
Class Ht J I 4 5 
Book . B ' ? 

CDIVRiGKT DEPOSm 



SELECTIONS AND DOCUMENTS 
IN ECONOMICS 



EDITED BY 



WILLIAM Z. RIPLEY, Ph.D. 

Professor of Economics, Harvard University 



SELECTIONS AND DOCUMENTS 
IN ECONOMICS 

TRUSTS, POOLS AND CORPORATIONS 

(Revised Edition) 

By William Z. Ripley, Ph.D., Professor of 

Political Economy, Harvard University 

TRADE UNIONISM AND LABOR 
PROBLEMS {Second Series) 
By John R. Commons, Professor of Political 
Economy, University of Wisconsin 

SOCIOLOGY AND SOCIAL PROGRESS 

By Thomas N. Carver, Ph.D., Professor of 
Political Economy, Harvard University 

SELECTED READINGS IN PUBLIC 
FINANCE {Second Edition) 
By Charles J. Bullock, Ph.D., Professor of 
Economics, Harvard University 

RAILWAY PROBLEMS {Re-vised Edition) 

By William Z. Ripley, Ph.D., Professor of 
Political Economy, Harvard University 

SELECTED READINGS IN ECONOMICS 
By Charles J. Bullock, Ph.D., Professor of 
Economics, Harvard University 

ECONOMIC HISTORY OF THE UNITED 
STATES. 176s -i860 

By Guy Stevens Callender, late Professor of 
Political Economy, Yale University 

SELECTED READINGS IN RURAL 
ECONOMICS 

By Thomas N. Carver, Ph.D., Professor of 
Political Economy, Harvard University 

READINGS IN SOCIAL PROBLEMS 

By Albert Benedict Wolfe, Professor of Eco- 
nomics, University of Texas 



SELECTED READINGS IN 
PUBLIC EINANCE 



BY 

CHARLES J. BULLOCK 

PROFESSOR OF ECONOMICS IN HARVARD UNIVERSITY 



SECOND EDITION 




GINN AND COMPANY 

BOSTON • NEW YORK • CHICAGO • LONDON 
ATLANTA • DALLAS • COLUMBUS • SAN FRANCISCO 



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COPYRIGHT, 1906, 1920, BY 
CHARLES J. BULLOCK 



ALL RIGHTS RESERVED 



©CI,A6015?6 



NOV !8 1920 



Wbt atftengum H^rtea 

GINN AND COMPANY • PRO- 
PRIETORS • BOSTON • U.S.A. 



PREFACE 

This volume aims to bring together under one cover the 
collateral reading needed for a general course in public finance. 
It is intended to supplement the instruction usually given by 
lectures and text-books. The selections have been drawn from 
a considerable variety of sources, both new and old, and deal 
with most of the topics ordinarily included in such a course. 
Upon various controverted questions the arguments of the 
earlier disputants have been reproduced, and in other cases 
an effort has been made to draw upon the work of the older 
standard authors. In this way it is hoped that the book will 
serve a useful purpose in introducing the student to the litera- 
ture of the science of finance. 

It would-be a pleasure to make express acknowledgment here 
of the many favors which have been granted in the preparation 
of the volume. But the footnotes to the various selections serve 
this general purpose ; and the editor must be content simply to 
record his appreciation of the cordial cooperation of the authors 
who have given him permission to draw upon their works, and of 
the publishers who have consented to the reproduction of copy- 
righted material. Thanks are due also to the editor's wife, 
upon whom fell a large share of the harder work attending the 
preparation of the book. 

CHARLES J. BULLOCK 



PREFACE TO THE SECOND EDITION 

This second edition retains the greater part of the original 

selections, but replaces a part with later material. It also draws 

upon recent scientific and official publications for a number of 

new selections. 

CHARLES J. BULLOCK 

Cambridge, Massachusetts 



vi 



CONTENTS 

CHAPTER PAGE 

I. The Literature of Public Finance. (The Editor) 

1. Mediaeval Finance i 

2. The Formative Period 2 

3. The Nineteenth Century 7 

II. General Considerations concerning Public Expenditures 

4. The Views of Smith and Mill concerning the Functions of 

Government 11 

5. Public and Private Business Compared 19 

6. The Economic Effects of Public Expenditure : Early Opinions 21 

7. The Views of Smith and Say 23 

8. Dietzel's Theory of Public Expenditures 27 

III. The Increase of Public Expenditures in Modern Times 

9. Wagner's Law 32 

10. A General Survey and Interpretation of the Facts, by Pro- 

fessor F. S. Nitti 32 

11. The Growth of Federal Expenditures in the United States, 

by Charles J. Bullock 47 

12. Our Increasing Public Expenditures, by T. E. Lyons ... 51 

13. Methods of controlling the Movement of Public Expendi- 

tures : Report of a Committee of the National Tax 
Association 70 

IV. Public Revenues : the View^s of Bodin and Smith 

14. Bodin's Classification of Revenues 76 

15. Smith's Classification and Discussion 78 

■' V. Revenues from Domains 

16. Later Views concerning Domains, by K. H. Rau 87 

17. The Public Domain of the United States, by Albert Bushnell 

Hart 90 

18. The Case of Forests : the Views of Leroy-Beaulieu .... 98 

19. National Forest Reserves in the United States 100 

VI. Revenues from Public Industries 

20. The Post Office, by President A. T. Hadley 104 

21. The Post Office and Other Industries, by W. S. Jevons . . 115 

22. The Swiss Federal Railways, by A. N. Holcombe .... 128 

23. Municipal Industries: the Views of Mill and Farrer . . . 144 

vii 



viii SELECTED READINGS IN PUBLIC FINANCE 

CHAPTER PAGE 

24. The Policy of American Municipalities, by C. W. Haskins . 147 

25. The Commercial Revenues of Frankfort, by Anna Youngman 155 

VII. Fees 

26. The Nature of Fees, by K. T. Eheberg * 191 

27. The Fee System of our Federal Government, by T. K. Urdahl 194 

28. Some Other Typical Fees, by T. K. Urdahl 200 

29. The Fee System as a Social Force, by T. K. Urdahl . . . 207 

30. Revenue from Fees in Frankfort, by Anna Youngman . . . 216 

VIII. General Propositions concerning Taxation 

31. Smith's Canons of Taxation 219 

32. The General Economic Effect of Taxation : the Views of 

Hume and McCulloch 222 

33. The Views of Say 227 

34. The Source of Taxation : the Views of Ricardo and Mill . . 228 

IX. Justice in Taxation 

35. The Views of Say and McCulloch 234 

36. The Views of Mill 241 

37. Wagner's " Socio-political " Theory of Taxation 254 

38. Criticism of Wagner's Theory, by E. R. A. Seligman ... 258 

39. Progressive Taxation, by E. R. A. Seligman 260 

X. Capitation Taxes 

40. The Poll Tax in American Commonwealths 269 

41. The Poll Tax in Massachusetts: the Views of the Commis- 

sion of 1897 270 

42. The Poll Tax in North CaroHna, by G. E. Barnett .... 271 

43. The Poll Tax in Mississippi and Georgia, by C. H. Brough 

and L. F. Schmeckebier 275 

XI. The General Property Tax 

44. The New York Tax Commission of 187 1 and 1872 .... 278 

45. The General Property Tax in the United States, by Charles J. 

Bullock 283 

46. The Taxation of Property and Income in Massachusetts, by 

Charles J. Bullock 304 

47. TheGeneralProperty Tax in Switzerland, by Charles J. Bullock 350 

XII. The General Income Tax 

48. The Prussian Income Tax, by J. A. Hill 380 

49. The British Income Tax, by J. A. Hill 391 

50. The Income Tax in American Commonwealths, by D. O. 

Kinsman 401 

51. The Wisconsin Income Tax, by Thomas S. Adams .... 406 

52. Federal Taxation of Incomes, by F. C. Howe 422 



CONTENTS ix 

HAPTER PAGE 

53. The Income Tax of 1894, by F. C. Howe 427 

54. The Federal Income Tax of 191 3, by Charles J. Bullock . . 430 

XIII. Problems in State and Local Taxation in the United States 

55. The Separation of State and Local Revenues, by Charles J. 

Bullock 445 

56. A Classified Property Tax, by Charles J. Bullock 460 

57. The State Income Tax and the Classified Property Tax . . 469 

58. Preliminary Report of the Committee of the National Tax 

Association, upon a Plan of a Model System of State 
and Local Taxation 

XIV. Problems of Tax Administration 

59. Central Control of the Valuation of Taxable Subjects, by 

Samuel T, Howe 

60. The Administration of Laws for the Taxation of Property : 

Report of a Committee of the National Tax Association 552 

61. The Assessment of Real Estate; Report of a Committee of 

the National Tax Association 564 

XV. The Imp St Personnel-mobilier 

62. General Description of this Tax 578 



491 



533 



63. The Working of the Impot Personnel, by Leroy-Beaulieu . . 579 

64. The Working of the Impot Mobilier, by Boucard and Jeze . 581 

65. The Theory of the Impot Mobilier, by Leroy-Beaulieu . . . 583 

66. Proposals for a Tax on Rentals in the United States . . . 585 

XVI. Taxes on Business - 

67. The French Business Tax, by Caillaux and Leroy-Beaulieu 592 

68. The Prussian Business Tax, by J. A. Hill . 599 

69. The License Tax in Massachusetts, by the Tax Commission 

of 1897 608 

70. License Taxes in Maryland, by T. S. Adams 609 

71. License Taxes in Mississippi, by C. H. Brough 615 

XVII. The Corporation Tax 

72. The General Corporation Tax 621 

j^- The Taxation of Public- Service Corporations : Report of the 

Connecticut Tax Commission of 1913 628 

74. The Taxation of Public- Service Corporations : Report of a 

Committee of the National Tax Association 651 

75. State and Local Taxation of Banks, by F. R. Fairchild ... 661 

XVIII. The Inheritance Tax 

76. State Inheritance Taxes in the United States : the Special Re- 

port of the Board of Tax Commissioners of Rhode Island 681 

77. A National Inheritance Tax, by E. R. A. Seligman .... 696 



SELECTED READINGS IN PUBLIC FINANCE 



CHAPTER 

XIX. 



XX. 



XXI. 



XXII. 



XXIII. 



XXIV. 



XXV. 



XXVI. 



XXVII. 



PAGE 

The Increment Tax : Local Taxation in Frankfort 

78. The New British Land Taxes, by Carl C. Plehn 702 

79. The German Imperial Tax on the Unearned Increment, by 

R. C. Brooks 733 

The Customs Revenue of the UiN^TED States 

80. The Financial Aspects of the Customs Revenue, by R. F. 

Hoxie 755 

The Internal Revenue System of the United States 

81. The Taxation of Spirits (1862-1870), by David A. Wells . . 779 

82. Internal Taxation from 1870-1894, by F. C. Howe .... 785 

83. The War Taxes of 1898, by C. C. Plehn 792 

The Early Development of Public Borrowing 

84. The Views of David Hume 803 

85. The Views of Adam Smith 805 

The Nature and Economic Effects of Public Debts 

86. Early Optimistic Theories 822 

87. The Views of Alexander Hamilton 824 

88. National Debts as a " National Blessing" 829 

89. The Views of Adam Smith 833 

90. The Views of Say 840 

91. The Views of Karl Dietzel 844 

Should a National Debt be Paid ? 

92. The Views of Mill 852 

93. The Views of H. C. Adams 856 

Sinking Funds 

94. The Theories of Dr. Price 863 

95. Robert Hamilton's Criticism of Price 871 

96. Sinking-Fund Legislation in the United States, by E. A. Ross 881 

National and Local Debts Compared 

97. Differences in the Nature of National and Local Debts, by 

H. C. Adams . 887 

98. Differences in the Principles of Financiering Applicable to 

National and Local Debts, by FI. C. Adams 894 

Financial Legislation in the United States 

99. Problems of Budgetary Reform 903 



SELECTED READINGS IN 
PUBLIC FINANCE 

CHAPTER I 

THE LITERATURE OF PUBLIC FINANCE » 

1. Mediaeval Finance. — Some of the subjects treated by 
public finance have never escaped entirely the attention of his- 
torians ^ and writers upon statecraft or political philosophy.^ 
Until the close of the Middle Ages, however, the financial trans- 
actions of European states were not sufficiently important to 
invite anything approaching systematic study. Kings were sup- 
ported chiefly by the revenues derived from their private domains 
or various fiscal prerogatives, while taxation was in theory — 
and generally in practice — an extraordinary resource, reserved, 
as Thomas Aquinas held it should be, for unusual emergencies.* 
The finances of a feudal state were hardly more than the 
finances of a royal household ; and, in fact, savored rather of 
private than public housekeeping.^ In the eleventh and twelfth 
centuries, with the revival of industry and commerce, numerous 

^ For an extended bibliography see Stammhammer, Bibliographic der Finanz- 
wissenschaft (1903). 

2 A work entitled The Revenues of Athens, commonly attributed to Xenophon, 
discusses methods of improving the wealth and revenues of that city. Roman 
historians occasionally mentioned the subject of taxation ; Tacitus and Suetonius are 
examples. 

^ In the thirteenth and fourteenth centuries some of the Schoolmen touched upon 
certain financial questions. Thomas Aquinas, for instance, considered the rights of 
the sovereign in respect to taxation. In ordinary times, he taught, the King should 
live upon the income from his domains ; but in time of extraordinary emergencies, 
his subjects should subinit to taxation, which, however, ought to be moderate and 
just. Similar maxims were expressed by Petrarch (De republica optime adminis- 
tranda), and by other Humanists. 

* Aquinas wrote : " Unde constituti sunt reditus terrarum Principibus, ut ex 
illis f>iventes a spoliatione subditorum abstineant." 

^ One of the laws of Charlemagne, the capitulary de villis, lays down the following 
rules for the management of the Emperor's estates : " We desire that each steward 



2 SELECTED READINGS IN PUBLIC FINANCE 

towns began to grow rapidly in various parts of Europe and to 
gain a large measure of independence in internal affairs. With 
them, problems of finance soon engaged attention, and financial 
institutions early assumed something like a modern character. 
Poll and property taxes were introduced, duties laid upon arti- 
cles of consumption, and municipal debts created. Yet, so far 
as we know, these interesting developments did not, outside of 
Italy, call forth any noteworthy discussion of financial problems. 

2. The Formative Period. — In Italy, however, the quicken- 
ing of intellectual life and the growing importance of commercial 
and financial transactions led to interesting developments in the 
fifteenth century. At Florence various financial problems came 
to the forefront, and the question of progressive taxation aroused 
the keenest interest.^ In the Kingdom of Naples, moreover, 
Diomede Carafa, a soldier and statesman, produced a most 
interesting treatise upon statecraft (De regis et boni principis 
officio), in which financial questions received more serious treat- 
ment than ever before, perhaps, had been accorded to them. 
Carafa devoted one of the four parts of his work to the adminis- 
tration of the revenues of the prince. In general, he stood upon 
the ground of his predecessors, such as Aquinas and Petrarch, 
holding that income from domains should be the basis of state 
finance, and taxes a subordinate form of revenue. But he pro- 
shall make an annual statement of all our income, giving an account of our lands 
cultivated by the oxen which our own plowmen drive and of our lands which the 
tenants of farms ought to plow ; of the pigs, of the rents, of the obligations and 
fines ; of the game taken in our forests without our permission ; of the various com- 
positions ; of the mills, of the forest, of the fields, of the bridges and ships ; of the 
free men and the districts under obligations to our treasury ; of markets, vineyards, 
and those who owe wine to us ; of the hay, firewood, torches, planks, and other 
kinds of lumber ; of the waste lands ; of the vegetables, millet, panic ; of the wool, 
flax, and hemp ; of the fruits of the trees ; of the nut trees, larger and smaller ; of 
the grafted trees of all kinds ; of the gardens ; of the turnips ; of the fish ponds ; 
of the hides, skins, and horns ; of the honey and wax ; of the fat, tallow, and soap ; 
of the mulberry wine, cooked wine, mead, vinegar, beer, and wine, new and old ; of 
the new grain and the old ; of the hens and eggs ; of the geese ; of the number 
of fishermen, workers in metal, sword makers, and shoemakers ; of the bins and 
boxes; of the turners and saddlers; of the forges and mines, — that is, of iron, 
lead, or other substances ; of the colts and fillies." 

^ Palmieri (1405-1475) and Guicciardini (1483-1540) are the most important 
writers to be mentioned in this connection. For an account, in English, of progres- 
sive taxation in Florence, see Seligman, Progressive Taxation, 22-26, 70. 



THE LITERATURE OF PUBLIC FINANCE 3 

ceeded to divide public expenditures into three classes: (i) 
those for the defense of the state ; (2) those for the support of 
the prince ; and (3) those for contingencies. Expenses, he said, 
should be moderate, so that a balance may remain which will be 
available for emergencies ; then, too, economy makes it possible 
to dispense with bad taxes and to use only the best. Taxes, he 
argued, should be stable, and should be certain, so that citizens 
may know precisely what they are expected to pay. All reve- 
nues, finally, should be strictly accounted for, and the accounts 
should be frequently examined by the proper officers. In all 
things the prince should remember that the wealth of his sub- 
jects is the real foundation of a prosperous condition of his 
finances.-^ 

By the close of the sixteenth century the growth of vigorous 
monarchies upon the ruins of the feudal system had proceeded 
far enough to compel more serious consideration of politics and 
finance.^ In 1576 Jean Bodin published a celebrated work 
upon political philosophy (Les six livres de la republique), which 
for many years exercised a wide influence upon writers in all 
the countries of Europe. Bodin devoted the sixth book of his 
treatise to " several political questions," one of which was the 
proper management of the finances, ''the nerves of the state." 
For such management, he said, three things are necessary : 
" The first is honest means of raising revenues ; the second is 
to employ them for the profit and honor of the state ; and the 
third, to save some portion of them for time of need." Concern- 
ing the first point, he argued that domains are " the most honest 
and assured " form of revenue ; but he approved of customs 
duties " upon merchants who bring in or take out commodities, 
which are one of the oldest, most common, and most equitable " 
of financial devices ; and admitted the propriety of direct taxes ^ 

1 Carafa said : " Subditorum qtiippe facultates potentiae regiae fundamentum 
existimari opporleret." 

2 Financial problems became important on account of the growth of public 
expenses, the increasing frequency and weight of taxes, and the many evil expedients, 
such as forced loans or debasements of the currency, employed in order to raise 
money. 

2 Bodin contended, however, that in Spain, England, Germany, and France it was 
established, by long custom, that " no prince has power to levy a tax upon his sub- 
jects, or to require this duty, without their consent." 



4 SELECTED READINGS IN PUBLIC FINANCE 

upon the subjects of the prince when ''all other means are insuf- 
ficient and there is urgent necessity of providing for the state." 
Under the second topic, the employment of the revenues, Bodin 
mentions the various branches of outlay,^ condemns extrava- 
gance, urges the need for economy, and advises that an annual 
account be prepared, showing the condition of the finances. And, 
finally, upon the third topic, Bodin urged that out of the rev- 
enues a reserve, or treasure, should be accumulated in order 
that the state "may not be obliged to begin a war by borrowing 
or levying a subsidy." Borrowing at interest he believed to be 
the ruin of princes and their finances. 

During the seventeenth and eighteenth centuries public 
finance was increasingly studied in Germany, where not a few 
professors in the universities and officials in the service of vari- 
ous German states were occupied with the subject. Regarding 
finance as an important branch of public business, they gen- 
erally approached it from the point of view of the prudent 
administrator, anxious to husband and develop the resources 
of his estate.^ While, at the start, many of them were greatly 
influenced by Bodin, they investigated assiduously the conditions 
existing in the German states, and in time gave their studies an 
independent basis. In the writings of J. H. von Justi^ German 
financial science of the eighteenth century reached its ripest 
development. Justi divided finance, as Bodin had done, into 
three parts : the study of revenues, of expenditures, and of 
methods of meeting extraordinary emergencies. Like other 
cameralists, he considered the income from domains the real 
foundation of public housekeeping, and taxes a subordinate 

1 He gives the following resume : " With the King's household maintained, the 
troops and their officers paid, and just wages given to those who have earned them, 
it is right that the poor should be remembered. And if any funds remain, they 
should be employed in rebuilding towns, fortifying strongholds, building forts on the 
frontier, improving the roads, repairing bridges, equipping ships, constructing public 
edifices, and establishing colleges of honor, virtue, and learning." 

2 Pluance became, in this way, a part of what was known as " cameral science," 
which included all branches of knowledge needed for the proper administration of 
the possessions of the prince. Sometimes " cameral science " was used in a narrower 
sense, as equivalent to financial science, and thus was contrasted with the cameralistic 
sciences in the broader sense. 

3 Staatswirthschaft, oder systematische Abhandlung aller oekonom. und Kameral 
wissenschaften (1755). 



THE LriERATURE OF PUBLIC FINANCE 5 

form of revenue. Yet this did not prevent him from studying 
the various kinds of taxes, in their economic and political bear- 
ings, more carefully than most other writers had done. Public 
expenditures he treats in some detail, assigning to mihtary out- 
lay at least one half of the total. In order to finance serious 
emergencies he favored, like nearly all his forbears, the accum- 
ulation of a state treasure ; yet he considers also the other 
expedient, public debts. 

Although Bodin's work was translated into English (1606), 
financial topics received less attention in England than in 
Germany during the greater part of the seventeenth century. 
Sir William Petty 's Treatise of Taxes and Contributions (1662) 
was probably the first English work which professed to deal 
primarily ^ with public finance. In this, with numerous digres- 
sions, the author treats of public expenditures and revenues. 
The former he divides into: (i) outlay for "Defence by Land 
and Sea" ; (2) outlay for the " Maintenance of the Governours, 
Chief and Subordinate " ; (3) outlay for the support of religion ; / 
(4) outlay for education ; (5) outlay for the relief of orphans, 
the impotent, and the destitute ; and (6) outlay for various pub- 
lic works, such as highways and bridges. Petty then considers 
the various branches of revenue, holding that a tax upon the 
land of a kingdom is better than the reservation of " Crown 
Lands." He favored excise taxes, also, believing that they 
tended to distribute burdens in a fair manner, viz. in proportion 
to what every man "taketh to himself, and actually en joy eth " ; 
and discussed the advantages and disadvantages of other forms 
of taxation. After 1690 the growth of national expenditures 
and taxes, together with the rapid increase of the national debt, 
stimulated the discussion of such subjects as taxation and pub- 
lic debts ; so that a large number of tracts and treatises, often 
of a fugitive character, made their appearance. Methods of 
dealing with the debt were warmly debated, and the best 
methods of raising the large revenues now required by the gov- 
ernment formed another engrossing topic. Some writers advo- 
cated a general excise upon articles of consumption, and others 

^ Other works had dealt incidentally and briefly with financial topics. Thomas 
Mun's England's Treasure by Forraign Trade (written prior "to 1641 and published 
1664) devotes three short chapters to public revenues and treasures. 



6 SELECTED READINGS IN PUBLIC FINANCE 

wished to confine such taxation to luxuries ; some preferred a 
single tax upon land or a tax upon houses, while others argued 
for a general property tax or a combination of different kinds 
of taxes. Out of such discussions of particular topics a large 
body of financial literature had developed in England by the 
middle of the eighteenth century.^ Yet little of the writing had 
been systematic, and nothing like a comprehensive treatise upon 
finance had come into existence. 

In France, after the time of Bodin, comparatively little 
attention was given to the study of finance until disorders and 
abuses in the public housekeeping had become so grave as to 
call loudly for reform. Early in the eighteenth century Mar- 
shal Vauban, who in the course of his campaigns had observed 
the wretched condition of many parts of the country, proposed 
reforms in taxation, by which a tax upon all incomes, sup- 
plemented by various duties upon imports and articles of con- 
sumption, should replace existing taxes. In 1748 appeared 
Montesquieu's celebrated Esprit des lois, which treats of both 
taxation and public debts, briefly, but in a manner which influ- 
enced not a little the subsequent course of thought. Montes- 
quieu emphasized particularly the political relations of public 
finance, observing, for instance, that a free people will sub- 
mit to heavier taxation than a despotic ruler can impose upon 
his subjects ; and took a very unfavorable view of public debts. 
Ten years later Quesnay, the founder of the Physiocratic 
School, published his Tableau CEconomique, in which he devel- 
oped the first consistent theory of the production and distribu- 
tion of wealth, and correlated the theory of taxation with the 
fundamental doctrines of his new science. Holding that the net 
produce of the land is the only source from which the wealth of 
a society can be increased and the only fund from which taxes 
can be drawn, the Physiocrats argued that all other taxes should 
be abandoned and public revenue raised by a single tax upon 
the ^* prodtdt net'' of the soil.^ Beyond urging that govern- 

* Of this copious literature David Hume's essays on " Taxes " and " Public Credit " 
(1752) may be mentioned ; also Sir James Steuart's Inquiry into the Principles of 
Political Economy (1767), which, besides considering the subject of public credit, 
devotes an entire book to taxes. 

'^ Quesnay, in the Tableau Qiconomique, showed that it followed from his theory of 



THE LITERATURE OF PUBLIC FINANCE J 

ments should confine their activity to the narrowest possible ^ 
limits, and, therefore, exercise economy in their expenditures, 
the Physiocrats contributed nothing further to the history of 
public finance. 

A new era opened with the publication of Adam Smith's 
Wealth of Nations (1776). Drawing upon the work of his 
predecessors and the results of his own observations and ripe 
reflection, Smith skillfully developed a body of doctrine which 
in finance, as in other departments of economic study, served as 
the foundation of most subsequent inquiry. Believing that one 
of the two objects of political economy is "to supply the state 
or commonwealth with a revenue sufficient for the public ser- 
vices," he devoted the fifth book of the Wealth of Nations to 
the " Revenue of the Sovereign or Commonwealth," and treated, 
in order, public expenditures, public revenues, and public debts. ^ 
Translated into one language after another, the Wealth of 
Nations exercised a profound influence upon economic thought 
in the leading countries of Europe ; while it came, before long, 
to dominate the thought of Great Britain, and was extensively 
read in the United States. With many topics treated in the 
following chapters it will be necessary for us to begin by con- 
sidering the doctrines of Adam Smith. 

3. The Nineteenth Century. -^ In Great Britain after the 
time of Smith the systematic study of public finance seemed 
to languish. Writers of economic treatises continued to discuss 
taxation and public debts ; but showed a tendency to confine 
themselves to questions of more or less abstract theory, and 
often relegated the subjects to a decidedly subordinate position.^ 



the " produit net " that taxation " should be placed immediately upon the revenue 
of the landed proprietor, and not upon commodities where it would multiply the cost 
of collection and injure commerce." 

1 The three chapters, or main divisions, of the fifth book recall clearly the three 
divisions of Bodin's chapter, viz. "honest means of raising revenues," methods of 
employing them, and reserving treasure for times of need. Smith placed expendi- 
ture first, as Petty had done, instead of second, as Bodin had preferred to do. 

'■^ James Mill (1821) treated of taxation while considering the consumption of 
wealth. John Stuart Mill (1848) discussed somewhat briefly taxation and national 
debts. Ricardo, on the other hand, entitled his most important work, Principles of 
Political Economy and Taxation (181 7), and made important contributions to the 
theory of shifting and incidence. 



8 SELECTED READINGS IN PUBLIC FINANCE 

Yet not a few important pamphlets or treatises were written 
upon special topics of immediate practical interest;^ and, in 
1845, McCulloch published his Treatise on Taxation and the 
Funding System, which, as the title indicates, deals systemat- 
ically with two out of the three divisions of public finance 
recognized in the Wealth of Nations. Not until 1892 did the 
first real treatise upon finance appear in Great Britain; and 
this work still holds exclusive possession of the field,^ although 
there has been an increased output of literature dealing with 
special parts of the science, particularly with taxation."* 

In France during the nineteenth century financial studies 
followed practically the same course as in Great Britain. Gen- 
eral treatises upon economics relegated financial topics to a 
subordinate position,* while there was a considerable output of 
meritorious works upon financial history and administration or 
other special subjects.^ In 1862 Joseph Garnier brought out 
an unsatisfactory treatise upon public finance,^ and somewhat 
later Paul Leroy-Beaulieu produced a decidedly superior manual 
which still ranks with the leading works upon our science.'^ 
France, too, has given us a very useful Dictionnaire des finances, 
edited by Leon Say, who, as student, administrator, and publicist, 
was one of the prominent figures in French finance during the 
last quarter of the nineteenth century. 

In Germany the study of finance had developed so far during 
the eighteenth century that the production of systematic treatises 
proceeded apace during the nineteenth. The first important 
development was the modification of many of the received cam- 

1 One of the most noteworthy was Robert Hamilton's Inquiry concerning the 
Management of the National Debt (1813). 

2 C. F. Bastable, Public Finance (third edition, 1903). R. H. Patterson's Science 
of Finance {1868) is not a treatise upon public finance. 

^ It should be observed that the fifth book of Professor Nicholson's extensive 
treatise, Principles of Political Economy (i 893-1 901), devotes not less than fourteen 
out of its twenty chapters to public expenditures, taxation, and public debts. 

* J. B. Say (1803), for instance, treated expenditures, revenues, and public debts 
under the head of the consumption of wealth. 

5 Especially worthy of mention is Rene Stourm's Le budget (fourth edition, 
1900). 

® Traite des finances (fourth edition, 1883). 

' Traite de la science des finances (eighth edition, 191 2). Mention should be 
made, also, of the useful work by Jeze and Boucard, Elements de la science des 
finances et de la legislation financiere fran^aise (second edition, 1901). 



THE LITERATURE OF PUBLIC FINANCE 9 

eralistic doctrines under the influence of the teachings of Adam 
Smith. This work was practically accomplished by 1832 when 
K> H. Rau published the first part of his Grundsatze der Finanz- 
wissenschaft/ which for several decades remained the leading 
manual for university students and aspirants for administrative 
posts. After the middle of the century the influence of Smith 
began to decline, but not until his doctrines had left a perma- 
nent impress upon German financial science. Of the modern 
treatises the chief is Adolph Wagner's Finanzwissenschaft 
(1877-), which is still uncompleted, although four portly vol- 
umes have appeared. Of the shorter works, those by Roscher 
(fourth edition, 1894), Cohn (1889), Eheberg (seventh edition, 
1903), and von Meckel (1907, 191 1) should be mentioned ;^ while 
we should not overlook the third volume of Schonberg's Hand- 
buch der politischen Oekonomie (fourth edition, 1896-98), which 
contains a valuable collection of monographs upon the various 
parts of public finance. Most of the German writers have studied 
with care existing financial institutions and their history, and 
public finance has received a noteworthy impetus from their 
labors. 

While financial problems have demanded and received no 
little attention in the United States ever since the establishment 
of our national government, systematic study of public finance 
has been a comparatively recent development. In state papers 
or the writings of public men who have had to deal with ques- 
tions of finance, a considerable body of literature has always 
existed,^ but in w^hoUy unsystematic form. Our earliest text- 
books on economics accorded financial topics the same cursory 
treatment which they received at the hands of contemporary 
English or French writers. During the last forty years federal 
or state commissions appointed to consider urgent problems 
have published more or less elaborate reports upon taxation 

1 This, according to what has become the traditional German method, formed 
the third volume of Rau's Lehrbuch der politischen Oekonomie. 

2 The volumes by Roscher and Cohn are parts of larger treatises upon eco- 
nomics. Cohn's Finanzwissenschaft has been translated (Chicago, 1895). Eheberg's 
work is perhaps the most convenient for the student. 

3 Hamilton's Report on Public Credit (1790); Walcott's Report on Direct 
Taxes (1796); Gallatin's Sketch of the Finances of the United States {1796). 
For a much later period, maybe mentioned John Sherman's Speeches and Reports 
on Finance and Taxation (1879). 



10 SELECTED READINGS IN PUBLIC FINANCE 

and some other subjects, of which a few have been of high 
merit/ More recently there has been a gratifying increase of 
interest in finance,^ as in other departments of economic investi- 
gation, which has given us a considerable number of special 
studies upon taxation,^ public debts,* the financial history of our 
own country,^ and various other subjects,^ as well as three 
general treatises upon public finance.'^ Finally, the formation 
of the National Tax Association has given us a national organi- 
zation which is actively interested in all branches of public 
finance and publishes annually a volume of Proceedings.^ 

1 The New York Commission of 1871 and 1872, the Maryland Commission of 
1886, and the Massachusetts Commission of 1897 are examples of the reports 
dealing with taxation. The federal revenue system was searchingly investigated 
after the Civil War by Mr. David A. Wells, who, as commissioner of revenue, 
issued several reports. 

2 Of this perhaps the first signs were the numerous articles upon financial topics 
in Lalor's Cyclopaedia of Political Science (1883-84) and the translation of Cossa's 
Scienza delle finanze, under the misleading title, however, of Taxation, its Principles 
and Methods (1888). 

3 Ely, Taxation in American States and Cities (1888); Seligman, Essays in 
Taxation (eighth edition, 1910), The Shifting and Incidence of Taxation (third 
edition, 1909), Progressive Taxation (second edition, 1909) ; Howe, Taxation in 
the United States under the Internal Revenue System (1896) ; Wells, Theory and 
Practice of Taxation (1900). 

4 Adams, Public Debts (1887) ; Ross, Sinking Funds (1892); Scott, the Repu- 
diation of State Debts (1893). 

^ Works upon special parts of the field are too numerous to mention here. Of 
general works there are two : Bolles, Financial History of the United States 
(1879-1886) ; and Dewey, Financial History of the United States (1902). 

6 Urdahl, The Fee System in the United States (1898) ; Kinley, The Independ- 
ent Treasury of the United States (1893) ! Clow, Administration of City Finances 
in the United States (1901). 

' Adams, The Science of Finance (1898) ; Daniels, Elements of Public Finance 
(1899) ; Plehn, Introduction to Public Finance (third edition, 1909). 

8 Proceedings of the National Tax Association (1908-), A. E. Holcomb, Secre- 
tary, 195 Broadway, New York. 



CHAPTER II 

GENERAL CONSIDERATIONS CO'NCERNING PUBLIC 
EXPENDITURES 

4. The Views of Smith and Mill concerning the Functions of 
Government. — Adam Smith formulated his views in the follow- 
ing passage :^ 

According to the system of natural liberty, the sovereign has 
only three duties to attend to ; three duties of great importance, 
indeed, but plain and intelligible to common understandings : 
I. the duty of protecting the society from the violence and 
invasion of other independent societies ; 11. the duty of pro- 
tecting, as far as possible, every member of the society from 
the injustice or oppression of every other member of it, or the 
duty of establishing an exact administration of justice ; and 
III. the duty of erecting and maintaining certain public works 
and certain public institutions, which it can never be for the 
interest of any individual, or small number of individuals, to 
erect and maintain, because the profit could never repay the 
expense to any individual or small number of individuals, though 
it may frequently do mucl^ more than repay it to a great society. 

The doctrine that, beyond providing for external defense, 
affording legal protection, and undertaking a few indispensable 
public works, the government should not interfere with the 
affairs of its citizens has often been called the doctrine of 
laissez-faire. In the middle of the nineteenth century, when its 
influence was perhaps greatest, the theory was formulated in 
moderate and effective form by John Stuart Mill., At the outset 
Mr. Mill remarks 2 that "there must be a specification of the 
functions which are either inseparable from the idea of a govern- 

1 Wealth of Nations, Bk. IV, ch. 9. 

2 Principles of Political Economy, Bk. V, ch. i. 

II 



y 



12 SELECTED READINGS IN PUBLIC FINANCE 

ment, or are exercised habitually and without objection by all 
governments ; as distinguished from those respecting which it 
has been considered questionable whether governments should 
exercise them or not. The former may be termed the necessary, 
the latter the optional, functions of government. 

The necessary functions of government recognized by Mill 
are substantially the same as those recognized by Adam Smith, 
although the later writer does not draw the line of demarcation 
quite so sharply as the earlier. In fact, Mill says : 

In attempting to enumerate the necessary functions of govern- 
ment, we find them to be considerably more multifarious than 
most people are at first aware of, and not capable of being 
circumscribed by those very definite lines of demarcation, which, 
in the inconsiderateness of popular discussion, it is often at- 
tempted to draw round them. We sometimes, for example, 
hear it said that governments ought to confine themselves to 
affording protection against force and fraud ; that, these two 
things apart, people should be free agents, able to take care of 
themselves ; and that so long as a person practices no violence or 
deception, to the injury of others in person or property, legis- 
latures and governments are in no way called on to concern 
themselves about him. But why should people be protected by 
their government, that is, by their own collective strength, 
against violence and fraud, and not against other evils, except 
that the expediency is more obvious ? 



There is a multitude of cases in which governments, with 
general approbation, assume powers and execute functions for 
which no reason can be assigned except the simple one, that 
they conduce to general convenience. We may take as an ex- 
ample the function (which is a monopoly too) of coining money. 
This is assumed for no more recondite purpose than that of 
saving to individuals the trouble, delay, and expense of weigh- 
ing and assaying. No one, however, even of those most jealous 
of state interference, has objected to this as an improper exercise 
of the powers of government. 



PUBLIC EXPENDITURES 13 

But enough has been said to show that the admitted functions 
of government embrace a much wider field than can easily be in- 
cluded within the ring-fence of any restrictive definition, and that 
it is hardly possible to find any ground of justification common 
to them all except the comprehensive one of general expediency, 
nor to limit the interference of government by any universal rule 
save the simple and vague one that it should never be admitted 
but when the case of expediency is strong. 

In a subsequent chapter^ Mill considers the optional functions 
of government, and presents his reasons for believing that in 
the civilized countries of modern times the scope of govern- 
mental activity should be limited as narrowly as possible. In 
the first place, he says, governmental interference with economic 
affairs generally involves compulsion, which is unpleasant in 
itself, and, by preventing men from, acting according to their 
own judgment, tends "to starve the development of some portion 
of the bodily or mental faculties." Then, too, governmental 
action usually Involves expense, which must be defrayed out 
of compulsory contributions levied upon the persons or property 
of citizens. Mill then continues : 

A second general objection to government agency Is that 
every increase of the functions devolving on the government 
is an increase of its power, both in the form of authority and, 
still more, in the indirect form of influence. The Importance 
of this consideration, in respect to political freedom, has In 
general been quite sufficiently recognized, at least in England ; 
but many, in latter times, have been prone to think that limita- 
tion of the powers of the government is only essential when the 
government itself is badly constituted ; when it does not rep- 
resent the people, but Is the organ of a class, or coalition of 
classes ; and that a government of sufficiently popular constitu- 
tion might be trusted with any amount of power over the 
nation, since its power would be only that of the nation over 
itself. This might be true, if the nation, in such cases, did not 
practically mean a mere majority of the nation, and if minorities 
were only capable of oppressing, but not of being oppressed. 
1 Principles of Political Economy, Bk. V, ch. 11. 



14 SELECTED READINGS IN PUBLIC FINANCE 

Experience, however, proves that the depositaries of power who 
are mere delegates of the people, that is, of a majority, are quite 
as ready (when they think they can count on popular support) 
as any organs of oligarchy to assume arbitrary power and 
encroach unduly on the liberty of private life. The public col- 
lectively is abundantly ready to impose not only its generally 
narrow views of its interests but its abstract opinions, and even 
its tastes, as laws binding upon individuals. 



A third general objection to government agency rests on 
the principle of the division of labor. Every additional func- 
tion undertaken by the government is a fresh occupation im- 
posed upon a body already overcharged with duties. A natural 
consequence is that most things are ill done ; much not done at 
all, because the government is not able to do it without delays 
which are fatal to its purpose ; that the more troublesome, and 
less showy, of the functions undertaken are postponed or neg- 
lected, and an excuse is always ready for the neglect ; while 
the heads of the administration have their minds so fully taken 
up with ofhcial details, in however perfunctory a manner super- 
intended, that they have no time or thought to spare for the 
great interests of the state, and the preparation of enlarged 
measures of social improvement. 

But these inconveniences, though real and serious, result much 
more from the bad organization of governments than from the 
extent and variety of the duties undertaken by them. Govern- 
ment" is not a name for some one functionary, or definite number 
of functionaries : there may be almost any amount of division 
of labor within the administrative body itself. The evil in 
question is felt in great magnitude under some of the govern- 
ments of the Continent, where six or eight men, living at the 
capital and known by the name of ministers, demand that the 
whole public business of the country shall pass, or be supposed to 
pass, under their individual eye. But the inconvenience would 
be reduced to a very manageable compass in a country in 
which there was a proper distribution of functions between the 
central and local officers of government, and in which the 
central body was divided into a sufficient number of departments. 



PUBLIC EXPENDITURES 1 5 

But though a better organization of governments would 
greatly diminish the force of the objection to the mere multi- 
plication of their duties, it would still remain true that in all the 
more advanced communities the great majority of things are 
worse done by the intervention of government than the individ- 
uals most interested in the matter would do them, or cause them 
to be done, if left to themselves. The grounds of this truth are 
expressed with tolerable exactness in the popular dictum, that 
people understand their own business and their own interests 
better, and care for them more, than the government does, or 
can be expected to do. This maxim holds true throughout the 
greatest part of the business of life, and wherever it is true 
we ought to condemn every kind of government intervention 
that conflicts with it. The inferiority of government agency, 
for example, in any of the common operations of industry or 
commerce is proved by the fact, that it is hardly ever able to 
maintain itself in equal competition with individual agency, 
where the individuals possess the requisite degree of industrial 
enterprise and can command the necessary assemblage of means. 
All the facilities which a government enjoys of access to in- 
formation ; all the means which it possesses of remunerating, 
and therefore of commanding, the best available talent in the 
market — are not an equivalent for the one great disadvantage 
of an inferior interest in the result. 

^ H^ ^ Hs Hs * * 

I have reserved for the last place one of the strongest of the 
reasons against the extension of government agency. Even if 
the government could comprehend within itself, in each depart- 
ment, all the most eminent intellectual capacity and active talent 
of the nation, it would not be the less desirable that the conduct 
of a large portion of the affairs of society should be left in 
the hands of the persons immediately interested in them. The 
business of life is an essential part of the practical education of 
a people ; without which, book and school instruction, though 
most necessary and salutary, does not suffice to qualify them 
for conduct, and for the adaptation of means to ends. Instruc- 
tion is only one of the desiderata of mental improvement ; 
another, almost as indispensable, is a vigorous exercise of the 
active energies : labor, contrivance, judgment, self-control ; and 
the natural stimulus to these is the difficulties of life. This 



/ 



1 6 SELECTED READINGS IN PUBLIC FINANCE 

doctrine is not to be confounded with the complacent optimism, 
which represents the evils of life as desirable things, because 
they call forth qualities adapted to combat with evils. It is 
only because the difficulties exist, that the qualities which com- 
bat with them are of any value. As practical beings it is our 
business to free human life from as many as possible of its 
difficulties, and not to keep up a stock of them as hunters 
preserve game for the exercise of pursuing it. But since the 
need of active talent and practical judgment in the affairs of 
life can only be diminished, and not, even on the most favor- 
able supposition, done away with, it is important that those 
endowments should be cultivated not merely in a select few, but 
in all, and that the cultivation should be more varied and com- 
plete than most persons are able to find in the narrow sphere 
of their merely individual interests. A people among whom 
there is no habit of spontaneous action for a collective interest — 
who look habitually to their government to command or prompt 
/ them in all matters of joint concern — who expect to have every- 
thing done for them, except what can be made an affair of mere 
habit and routine — have their faculties only half developed ; 
their education is defective in one of its most important branches. 
Not only is the cultivation of the active faculties by exercise 
diffused through the whole community, in itself one of the 
most valuable of national possessions : it is rendered, not less, 
but more, necessary, when a high degree of that indispensable 
culture is systematically kept up in the chiefs and functionaries 
of the state. There cannot be a combination of circumstances 
more dangerous to human welfare than that in which intelli- 
gence and talent are maintained at a high standard within a 
, governing corporation, but starved and discouraged outside the 
pale. Such a system, more completely than any other, embodies 
the idea of despotism, by arming with intellectual superiority as 
an additional weapon those who have already the legal power. 
It approaches as nearly as the organic difference between human 
beings and other animals admits to the government of sheep 
b}^ their shepherd, without anything like so strong an interest 
as the shepherd has in the thriAdng condition of the flock. The 
only security against political slavery is the check maintained 
over governors by the diffusion of intelligence, activity, and 
public spirit among the governed. Experience proves the ex- 



M 



PUBLIC EXPENDITURES i/ 

treme difficulty of permanently keeping up a sufficiently high 
standard of those qualities : a difficulty which increases, as the 
advance of civilization and security removes one after another 
of the hardships, embarrassments, and dangers against which 
individuals had formerly no resource but in their own strength, 
skill, and courage. It is therefore of supreme importance that 
all classes of the community, down to the lowest, should have 
much to do for themselves ; that as great a demand should be 
made upon their intelligence and virtue as it is in any respect 
equal to ; that the government should not only leave as far as 
possible to their own faculties the conduct of whatever concerns 
themselves alone, but should suffer them, or rather encourage 
them, to manage as many as possible of their joint concerns 
by voluntary cooperation : since this discussion and management 
of collective interests is the great school of that public spirit, 
and the great source of that intelligence of public affairs, which 
are alwa3^s regarded as the distinctive character of the public 
of free countries. 

Mill conceded, hov/ever, that, while the presumption should 
always be in favor of liberty, there were numerous cases in which 
governmental interference could be justified. These, briefly, are 
cases in which the persons concerned do not understand their 
own interest, as education ; or are exercising power over other 
persons, such as infants, or idiots, who " are everywhere regarded 
as proper objects of the care of the state"; or can manage 
their aft'airs only through agents, as the shareholders of a joint- 
stock company, which needs proper regulation ; or cannot give 
practical effect to their desires unless a common rule is imposed 
upon all concerned, as laborers who wish to shorten their hours 
of toil ; or who are aided by the government in the general 
interest of society, as paupers ; or are conducting literary or 
scientific undertakings which do not appeal to the interest of 
enough private individuals to secure the needful support. Mill 
then concludes : 

The preceding heads comprise, to the best of my judgment, 
the whole of the exceptions to the practical maxim, that the 



i8 SELECTED READINGS IN PUBLIC FINANCE 

business of society can be best performed by private and volun- 
tary agency. It is, however, necessary to add, that the inter- 
vention of government cannot always practically stop short at 
the limit which defines the cases intrinsically suitable for it. In 
the particular circumstances of a given age or nation there is 
scarcely anything, really important to the general interest, which 
it may not be desirable, or even necessary, that the government 
should take upon itself, not because private individuals cannot 
effectually perform it, but because they will not. At some times 
and places there will be no roads, docks, harbors, canals, works 
of irrigation, hospitals, schools, colleges, printing presses, unless 
the government establishes them ; the public being either too 
poor to command the necessary resources, or too little advanced 
in intelligence to appreciate the ends, or not sufficiently practiced 
in joint action to be capable of the means. This is true, more 
or less, of all countries inured to despotism, and particularly of 
those in which there is a very wide distance in civilization 
between the people and the government : as in those which 
have been conquered and are retained in subjection by a more 
energetic and more cultivated people. In many parts of the 
world the people cafi do nothing for themselves which requires 
large means and combined action ; all such things are left undone 
unless done by the state. In these cases the mode in which the 
government can most surely demonstrate the sincerity with 
which it intends the greatest good of its subjects is by doing 
the things which are made incumbent on it by the helplessness 
of the public, in such a manner as shall tend not to increase 
and perpetuate but to correct that helplessness. A good govern- 
ment will give all its aid in such a shape as to encourage and 
nurture any rudiments it may find of a spirit of individual exertion. 



I have not thought it necessary here to insist on that part 
of the functions of government which all admit to be indispen- 
sable, the function of prohibiting and punishing such conduct on 
the part of individuals in the exercise of their freedom as is 
clearly injurious to other persons, whether the case be one of 
force, fraud, or negligence. Even in the best state which society 
has yet reached, it is lamentable to think how great a proportion 
of all the efforts and talents in the world are employed in 



PUBLIC EXPENDITURES 19 

merely neutralizing one another. It is the proper end of govern- 
ment to reduce this wretched waste to the smallest possible 
amount, by taking such measures as shall cause the energies 
now spent by mankind in injuring one another, or in protecting 
themselves against injury, to be turned to the legitimate employ- 
ment of the human faculties, that of compelling the powers of 
nature to be more and more subservient to physical and 
moral good. 

5. Public and Private Business Compared. — The financial 
activity of a government, like that of an individual, is concerned 
with the expenditure of money. In other respects, however, 
such as the ends pursued and the means employed, public and 
private business offer many points of contrast which are well 
presented by Eheberg :^ 

1. The ends sought by the state reach far beyond the sphere 
of individual activity. The economic activity of an individual is 
limited to the effort to procure, by means of mental or physical 
labor, the material goods which are needed to support life and 
satisfy his higher wants. The purpose of the state, however, 
is, first and foremost, to provide immaterial goods which defy 
measurement in money and yet are the basis of all spiritual 
or material progress, such as legal security, the maintenance of 
peace and national independence, and the development of the 
economic life of the people. 

2. In private business the ruling principle is special service 
and special payment : every service rendered receives its appro- 
priate payment which is determined by mutual agreement 
between buyer and seller. But the services rendered by the 
state, in so far as they are of a general and immaterial kind, 
cannot be individualized and separately valued ; so that special 
payment for special service is impossible. The payments which 
citizens make for services received from the state are not de- 
termined by contract, but by the authority of the state and 
according to norms which it establishes. Except in so far as it 
draws revenue from productive property which it owns, the state 

1 Finanzwissenschaft, Einleitung, § 3. 



20 SELECTED READINGS IN PUBLIC FINANCE 

secures its income by compulsion ; it possesses, that is, the right 
to demand the services of its citizens without payment, and to 
levy taxes upon the incomes or property of its subjects or other 
persons who happen to be within its jurisdiction.^ . . » 

3. The facts, that many of the services of the state are of an 
immaterial character and minister to intellectual or moral needs, 
and that many of them cannot be valued in terms of money, 
make it difficult or wholly impossible to compare the cost of 
production with the value of the product, as must be done in 
every well-ordered private business. While the payments which 
the citizens make in the form of taxes or duties can be readily 
calculated, the services rendered by the state cannot be reduced 
to figures. In this latter case an estimate can be formed only 
by a careful comparison of outlay with the results of expendi- 
ture. Often, too, it is necessary to observe the results achieved 
over a long period of time, since only then can it be determined 
whether the domestic or foreign policies to which the state 
devoted its revenues justified the sacrifices and met the expec- 
tations of the people — whether, that is, they contributed to 
spiritual and material progress. Such a comparison of the 
burden and the profit can best be made by an intelligent and 
unbiased representative assembly. ... 

4. A further peculiarity of public business is the unlimited du- 
ration of the elements with which it deals. Many expenditures 
for public purposes are made for the future as much as for the 
present.^ For this reason it is just that future generations 
should bear part of the burden of important public works or the 
defense of the state against great dangers — a thing which is 
accomplished through the agency of public debts. 

5. Finally, public business differs from private in that it is 
limited in respect to its outlay and its income. The outlay of 

1 Eheberg here alludes again to the fact that the state may have landed domains 
or public industries from which some revenue is raised. But he says that history 
shows that taxation has steadily increased in importance, at the expense of these 
revenues from domains and industries. — Ed. 

'^ For this reason, as Wagner observes, " the state can undertake enterprises 
which no private business could attempt on account of the limited duration of its 
life." Finanzwissenschaft, I, 14-15. Even more important is the consideration 
that in private business a quick return from the investment is generally desired, 
whereas the state can afford frequently to sacrifice present to future returns. — Ed. 



PUBLIC EXPENDITURES 21 

the state is limited by the range of the duties which are assigned 
it at any time ; and the amount of its income depends upon the 
nature and extent of its outlay. While in private business the 
acquisition of wealth is not limited in this manner, the income 
of the state fmds its measure in its financial needs. And while 
in private business expenses must be regulated by the income, 
the income of the state is determined, rather, by the amount of 
expenditures which are requisite. Itus true that, in determin- 
ing upon public expenditures, the possible revenue available 
should not be left out of consideration ; ^ but within these hmits 
the state regulates its income according to its expense. 

6. The Economic Effects of Public Expenditure : Early Opin- 
ions. — The economic effects of public expenditure, are far 
reaching. If the outlay is wisely directed, the economic life of 
the people may be greatly benefited,^ while unwise expenditure 
tends to impoverish a country. But, besides these obvious 
direct effects, public expenditure produces certain important 
indirect results. No inconsiderable part of the income of 
society is taken by governments in the form of taxes,^ and the 
expenditure of such enormous sums affects profoundly the direc- 
tion which industry takes, and, sometimes, the rate of wages 
which must be paid in private occupations.* 



1 This qualification is strongly emphasized by Roscher, who quotes Frederick the 
Great as saying that a state will bankrupt itself if it adopts the policy of saying, " I 
need so much ; raise the money," rather than, " I have so much money, and can 
therefore spend so much," Plnanzwissenschaft, § 109. — Ed. 

'^ This benefit, of course, is the justification of the expenditure. The first consti- 
tution of Pennsylvania (1776) declared that "the purpose for which any tax is to be 
raised ought to appear clearly to the legislature to be of more service to the com- 
munity than the money would be, if not collected." This, perhaps, was suggested 
by the remark of Sir James Stewart : " If the money raised be more beneficially 
employed by the state, than it would have been by those who contributed it, 
then I say the public has gained. . . ." Inquiry into Political Economy (1767), 
Bk. V, ch. 7. 

2 Leroy-Beaulieu estimated some years ago that the taxes levied in various 
countries of Europe represented from 6 to 15 per cent of the income of the people. 
Fraite, I, 133. 

* Capital will flow naturally into those industries the products of which are in 



22 SELECTED READINGS IN PUBLIC FINANCE 

But there is an old and very common fallacy, that govern- 
mental outlay is, in itself, a good thing, since it ** puts money 
into circulation " and increases the demand for labor. Jean 
Bodin, for instance, in 1576, enlarged upon the advantages 
which come from the expenditure of the royal revenues upon 
public works : " For beyond the fact that such works are neces- 
sary, there result besides great benefits to the commonwealth ; 
inasmuch as by this means the arts and artificers are supported, 
the poor are relieved, and dislike of taxes and duties is removed, 
when the prince restores to the public at large and to individual 
subjects the money he takes from them." 

Not infrequently this fallacy is found in company with the 
mercantilist notion that no sort of expense is seriously detri- 
mental provided the money be spent for goods of domestic pro- 
duction, and not for imported commodities.^ Thus Sir William 
Petty argued that expenditures for public works should be 
increased because, among other things, indigent people can 
be employed thereon ; and said : *' Now as to the work of these 
supernumeraries, let it be without expence of Foreign Com- 
modities, and then 'tis no matter if it be employed to build a 
useless Pyramid upon Salisbury Plain, bring the stones at Stone- 
henge to Tower-Hill, or the like. . . ." At the present day such 
errors recur persistently in popular discussions, usually in some 
such form as the following paragraph which appeared in a well- 
known newspaper in 1902: "What does the heedless throng 
know about the Philippine question, anyway ; and what does 
it care ? To be sure the army is costing the people millions 

great demand for public purposes. So, too, if governments offer more than the 
market rate of wages for labor, the wages in private employments may be af- 
fected. 

1 Sir Thomas Mun, for instance, wrote concerning luxurious expenditure as 
follows : " Again the pomp of Buildings, Apparel, and the like, in the Nobility, 
Gentry, and other able persons, cannot impoverish the Kingdom ; if it be done with 
curious and costly works upon our materials, and by our own people, it will maintain 
the poor with the purse of the rich. , , ." 



PUBLIC EXPENDITURES 23 

annually, but it is furnishing employment for thousands of men 
who might otherwise be idle, and the army supplies are pur- 
chased in this country, while the money for munitions and 
ordnance is disbursed in America to Americans. The war gives 
employment to idle men and distributes money to the contractors 
who are manufacturers." 

7. The Views of Smith and Say. — Although at least one of 
Petty's contemporaries perceived that such an idea was absurd,^ 
it remained for Adam Smith to destroy the foundation of this 
as of other mercantilist theories. Smith showed^ that all non- 
productive expenditure diminishes, so far forth, *'the funds 
destined for the employment of productive labor," even though 
"the expence of the prodigal should be altogether in home- 
made, and no part of it in foreign commodities," the exportation 
or non-exportatioii of gold and silver making no material dif- 
ference in the situation. Accordingly, while he considered it 
unnecessary to repeat the general principle, he argued that 
particular forms of public expenditure in no way increased the 
industry of the country or the employment given to labor. He 
says : ^ " By the reduction of the army and navy at the end of 
the late war, more than a hundred thousand soldiers and seamen, 
a number equal to what is employed in the greatest manufac- 
tures, were all at once thrown out of their ordinary employment ; 
but, though they no doubt suffered some inconveniency, they 
were not thereby deprived of all employment and subsistence. 
The greater part of the seamen, it is probable, gradually betook 
themselves to the merchant-service as they could find occasion, 
and in the meantime both they and the soldiers were absorbed 
in the great mass of the people, and employed in a great variety 

1 In 1699, Charles Davenant remarked : " Some persons have a strange notion, 
that large payments to the state are not hurtful to the public ; that taxes make 
money circulate ; that it imports not what A pays when B is to receive it." 

2 "Wealth of Nations, Bk. II, ch. 3 ; Cannan's edition, II, 320-322. 

3 Bk. IV, ch. 2; Cannan's edition, I. 434. 



24 SELECTED READINGS IN PUBLIC FINANCE 

of occupations,"^ And similarly he contended ^ that the pay- 
ment of interest upon the public debt was a burden upon indus- 
try even though the securities were all owned at home and no 
money left the country as a result of the operation. 

A generation later Jean Baptiste Say, a disciple of Smith, 
developed the argument in greater detail : ^ 

If I have made myself understood in the commencement of 
this third book, my readers will have no difficulty in compre- 
hending, that public consumption or that which takes place for 
the general utility of the whole community, is precisely analo- 
gous to that consumption, which goes to satisfy the wants of 
individuals or families. In either case, there is a destruction of 
values, and a loss of wealth ; although, perhaps, not a shilling 
of specie goes out of the country. 

******* 

The government exacts from a taxpayer the payment of a 
given tax in the shape of money. To meet this demand, the 
taxpayer exchanges part of the products at his disposal for coin, 
which he pays to the taxgatherer : a second set of government 
agents is busied in buying with that coin cloth and other neces- 
saries for the soldiery. Up to this point, there is no value lost 
or consumed ; there has only been a gratuitous transfer of value, 
and a subsequent act of barter; but the value contributed by 
the subject still exists in the shape of stores and supplies in the 
military depot. In the end, however, this value is consumed ; 
and then the portion of wealth which passes from the hands 
of the taxpayer into those of the taxgatherer, is destroyed and 
annihilated. 

Yet it is not the sum of money that is destroyed : that has 

1 With England's experience after the Seven Years' War it is interesting to com- 
pare that of the United States after the Civil War. Mr. J. F. Rhodes says: "It is 
well worth repeating that in the six months from May to November, 1865, 800,000 
men had changed from soldiers to citizens; and this change in condition was made 
as if it were the most natural transformation in the world. These soldiers were 
merged into the peaceful life of their communities without interruption to industry, 
without disturbance of social and moral order." History of the United States, 
V, 185-186. 2 Bk, V, ch. 3; Cannan's edition, II, 412. 

3 Traite d'economie politique, Bk. Ill, ch. 6. 



m 



PUBLIC EXPENDITURES. 25 

only passed from one hand to another, either without any return, 
as when it passed from the taxpayer to the taxgatherer ; or in 
exchange for an equivalent, as when it passed from the govern- 
ment agent to the contractor for clothing and supplies. The 
value of the money survives the whole operation, and goes 
through three, four, or a dozen hands, without any sensible 
alteration ; it is the value of the clothing and necessaries that 
disappears, with precisely the same effect as if the taxpayer 
had, with the same money, purchased clothing and necessaries 
for his own private consumption. The sole difference is, that 
the individual in the one case, and the state in the other, enjoys 
the satisfaction resulting from that consumption. 

The same reasoning may be easily applied to all other kinds 
of public consumption. When the money of a taxpayer goes 
to pay the salary of a public officer, that officer sells his time, 
his talents, and his exertions, to the public, all of which are con- 
sumed for public purposes. On the other hand, that officer 
consumes, instead of the taxpayer, the value he receives in lieu 
of his services ; in the same manner as any clerk or person in 
the private employ of the taxpayer would do. 

There has been long a prevalent notion that the values, paid 
by the community for the public service, return to it again in 
some shape or other ; in the vulgar phrase, that what government 
and its agents receive is refunded again by their expenditure. 
This is a gross fallacy ; but one that has been productive of 
infinite mischief, inasmuch as it has been the pretext for a great 
deal of shameless waste and dilapidation. The value paid to 
government by the taxpayer is given without equivalent or 
return : it is expended by the government in the purchase 
of personal service, of objects of consumption ; in one word, 
of products of equivalent value, which are actually transferred. 
Purchase or exchange is a very different thing from resti- 
tution. 

******* 

If, then, public and private expenditure affect social wealth 
in the same manner, the principles of economy, by which they V 
should be regulated, must be the same in both cases. There 
are not two kinds of economy, any more than two kinds of hon- 
esty or morality. If a government consume in such a way as to 



26 SELECTED READINGS IN PUBLIC FINANCE 

give birth to a product larger than that consumed, a successful 
effort of productive industry will be made. If no product result 
from the act of consumption, there is a loss of value, whether to 
the state or to the individual; yet, probably, that loss of value 
may have been productive of all the good anticipated. Military 
stores and supplies, and the time and labor of civil and military 
functionaries engaged in the effectual defense of the state, are 
well bestowed, though consumed and annihilated ; it is the same 
with them as with the commodities and personal service that 
have been consumed in a private establishment. The sole 
benefit resulting in the latter case is the satisfaction of a want ; 
if the want had no existence, the expense or consumption is a 
positive mischief, incurred without an object. So likewise with 
the public consumption ; consumption for the mere purpose of 
consumption, systematic profusion, the creation of an office for 
the sole purpose of giving a salary, the destruction of an article 
for the mere pleasure of paying for it, are acts of extravagance 
either in a government or an individual, in a small state or a large 
one, a republic or a monarchy. Nay, there is more criminality 
in public than in private extravagance and profusion ; inasmuch 
as the individual squanders only what belongs to him ; but the 
government has nothing of its own to squander, being, in fact, 
a mere trustee of the public treasure. 

Tf* "Jf ^ ^ ^ ^ ^ 

Madame de Maintenon mentions, in a letter to the Cardinal 
de Noailles, that, when she one day urged Louis XIV to be 
more Hberal in charitable donations, he replied, that royalty dis- 
penses charity by its profuse expenditure ; a truly alarming 
dogma, and one that shows the ruin of France to have been 
reduced to principle. False principles are more fatal than even 
intentional misconduct, because they are followed up with er- 
roneous notions of self-interest, and are long persevered in 
without remorse or reserve. If Louis XIV had believed his 
extravagant ostentation to have been a mere gratification of his 
personal vanity, and his conquests the satisfaction of personal 
ambition alone, his good sense and proper feeling would proba- 
bly, in a short time, have made it a matter of conscience to desist, 
or at any rate, he would have stopped short for his own sake ; 
but he was firmly persuaded that his prodigality was for the public 



PUBLIC EXPENDITURES 27 

good as well as his own ; so that nothing could stop him but 
misfortune and humiliation.^ 

So Uttle were the true principles of political economy under- 
stood, even by men of the greatest science, so late as the eight- 
eenth century, that Frederick II of Prussia, with all his anxiety 
in search of truth, his sagacity, and his merit, writes thus to 
D'Alembert, in justification of his wars : ** My numerous armies 
promote the circulation of money, and disburse impartially 
among the provinces the taxes paid by the people to the state." 
Again I repeat, this is not the fact ; the taxes paid to the gov- 
ernment by the subject are not refunded by its expenditure. 
Whether paid in money or in kind, they are converted into 
provisions and supplies, and in that shape consumed and de- 
stroyed by persons that can never replace the value, because 
they produce no value whatever. It was well for Prussia that 
Frederick II did not square his conduct to his principles. The 
good he did to his people, by the economy of his internal ad- 
ministration, more than compensated the mischief of his wars. 

8. Dietzel's Theory of Public Expenditures. — In 1855 Karl 
Dietzel pubHshed a book in which he sought to controvert the 
views of Smith and Say concerning the effect of public expendi- 

1 *' When Voltaire tells us, speaking of the superb edifices of Louis XIV., that 
they were by no means burdensome to the nation, but served to circulate money in 
the community, he gives a decisive proof of the utter ignorance of the most cele- 
brated French writers of his day upon these matters. He looked no further than 
tTie money employed on the occasion ; and, when the view is limited to that alone, 
the extreme of prodigality exhibits no appearance of loss ; for money is, in fact, an 
item, neither of revenue, nor of annual consumption. But a little closer attention 
will convince us of the fallacy of this position, which would lead us to the absurd 
inference, that no consumption whatever has occurred within the year, whenever the 
amount of specie at the end of it is found to be nowise diminished. The vigilance 
of the historian should have traced the 900 millions of francs expended on the 
chateau of Versailles alone, from the original production by the laborious efforts 
of the productive classes of the nation, to the first exchange into money, wherewith 
to pay the taxes, through the second exchange into building materials, painting, 
gilding, &c. to the ultimate consumption in that shape, for the personal gratifica- 
tion of the vanity of the monarch. The money acted as a mere means of facilitating 
the transfers of value in the course of the transaction ; and the winding up of the 
account will show a destruction of value to the amount of 900 millions of francs, 
balanced by the production of a palace, in need of constant repair, and of the 
splendid promenade of the gardens." 



28 SELECTED READINGS IN PUBLIC FINANCE 

tures. His theories have exercised no small influence upon later 
German writers. Dietzel said, in part:^ 

Even if we should confine our attention to the production 
and consumption of material goods, as well as personal services, 
and were willing to exclude altogether immaterial goods, it would 
still be easy to show that the consumption of goods by a govern- 
ment is a thoroughly productive form of consumption. Besides 
other favorable conditions, productive industry needs, for its un- 
disturbed and successful prosecution, protection against exter- 
nal forces which would otherwise disturb, delay, deteriorate, or 
annihilate the process of production. These disturbing factors 
may be either natural or human forces. The protection of in- 
dustry against such disturbances is, therefore, a necessary con- 
dition of production ; and the expenditures made for such a 
purpose must be considered productive. 

With institutions designed to protect industry against natural 
forces this is beyond question, and is denied by no one. Fac- 
tories, shops, and storehouses are, therefore, generally considered 
productive investments ; for the product could not be obtained 
or its value would be reduced if industry were not protected 
against the possible destructive effects of rain, wind, or sun. 

But it has not generally been perceived that the same is true 
of institutions designed to afford protection against human 
agencies. Human force, to be sure, is usually directed toward 
seizing upon the products of industry;* but it often has the 
result of merely decreasing the value of the products, and de- 
creases the labor force through drawing away the workmen to 
protect the land against attack. It often has the more lasting 
result of reducing labor power on account of injuries received 
in service, or of destroying it altogether. 

Everything which is threatened with destruction, but finally 
saved, is virtually newly produced ; in such a case we possess a 
thing which, without the protective institutions, we should not 
possess. These protective institutions, therefore, and the ex- 
penditure by which they are maintained, must be considered 
productive. This is true of protection of the products of labor 
and of the laborers themselves. Every expenditure by which a 
productive laborer is maintained is productive. 

^ Das System der Staatsanleihen, 11-15. 



PUBLIC EXPENDITURES 29 

In small affairs we recognize this productivity of protective in- 
stitutions without trouble, since we assign a shepherd to every 
herd and do not consider such expenditure unproductive. In 
large affairs, however, we do not recognize this, but deny to ex- 
penditures for public order and national defense the acknowl- 
edgment of their productivity. 

The principal institution for the protection of society against 
the evil effects of violence by human agencies is the state. It 
protects the peaceful labor of citizens, and the products of such 
labor, against disturbance or destruction by domestic or foreign 
enemies. As little as the herd can dispense with the shepherd 
can society exist without government and its protective action. 

Expenditure to procure domestic tranquiUity and to defend 
persons and property against attack is, to be sure, less harshly 
judged than military outlay ; its usefulness and the necessity of 
such public action is generally recognized. But should police- 
men be considered economically productive and the army unpro- 
ductive ? . . . 

The unproductivity of expenditures for war is used as the 
chief argument against pubUc borrowing because up to this 
time loans have been utilized for the most part to meet the 
great expenses of war. This view rests upon the assumption 
that the wars could have been avoided, which is a delusion. 
From the economic standpoint war, like any destructive out- 
break of natural forces, seems to be the result of circumstances 
and forces which are actually operating in society and must 
be accepted as a given fact. For our economic life, therefore, 
the only possible course is to seek to make this power, like the 
forces of nature, useful or harmless, as the case may permit. 
When undertaken for the purpose of defense, war makes prop- 
erty secure and insures the orderly ongoing of productive un- 
dertakings ; and all the wealth which, without its intervention, 
would have been destroyed or not produced, must be considered 
as produced with the cooperation of war. When it is a war of 
offense, it serves to obtain advantageous conditions for eco- 
nomic development or it averts future injuries to it. In both 
cases its purpose is to maintain or advance the national wealth. 
In the first case it secures valuable territory or favorably situ- 
ated localities, or, as a commercial war, opens up avenues of 



30 SELECTED READINGS IN PUBLIC FINANCE 

trade in regions previously closed. In the second it undertakes 
to maintain the balance of power, and to prevent the growth 
of other states which might later prove dangerous to the eco- 
nomic development of one's own land. 

War is, therefore, under existing conditions, an event that 
inevitably occurs from time to time, and we should not consider 
it an extraordinary occurrence that wrongfully burdens in- 
dustry and destroys its products. The outlay for war is one of 
the general costs of producing society. To diminish these costs 
and to provide for meeting such outlay with the least possible 
disadvantage to society, must be the leading economic principle 
in respect to war. It is realized by means of public loans. 

If the state by means of borrowed capital undertakes great 
outlays for other purposes which immediately subserve the pro- 
duction of material wealth, this form of public consumption can- 
not be considered unproductive. This is true when it uses the 
money for constructing means of communication, roads, canals, 
railroads, and the like ; and here the loans are not condemned 
on the ground that they encourage unproductive consumption. 
But could not the loans have been avoided, even in this case, if 
the state had limited or foregone other expenditures which are 
considered unproductive, as, for instance, outlay for public edu- 
cation and worship ? These expenditures, however, are produc- 
tive even so far as the production of material wealth is 
concerned. . . . Education improves the power of the work- 
man to labor, and religion tends to uplift the people morally, 
thereby contributing to the safety of productive industry. 

Elsewhere Dietzel says ^ that the state is a part of the *4m^ 
material " capital ^ of society, and the most important of all 
the forms of immaterial capital. The state, he says, is " a rela- 
tion which the whole body of the people has created by the 
expenditure of economic goods or labor, in order to contribute 
to the production of other goods," these being the " higher 

1 System der Staatsanleihen, 71, 99. 

2 " Immaterial " capital he defines as " all those relations and circumstances which 
exert a favorable influence upon economic society and increase its productivity, and 
which are created by the expenditure of economic goods." 



n 



PUBLIC EXPENDITURES 3 1 

development of society," and, in general, ''the higher forms of 
goods." Dietzel then proceeds to argue : 

This immaterial capital (the state) needs to be maintained 
intact, just like any other capital ; and, as society progresses, 
must be continually increased if the equilibrium between the 
different parts of the whole capital of society is to be undis- 
turbed. Every economic period must, therefore, make some 
expenditure for this purpose ; expenditure which, according to 
the varying conditions of the different periods, may be of 
various amounts. While, then, we enjoy without expense so 
much of the Hfe of the state as is an inheritance from the past, 
the outlay which our own generation makes for this purpose 
must be viewed as an investment of disposable private wealth 
in fixed capital which belongs to the whole community. 



CHAPTER III 

THE INCREASE OF PUBLIC EXPENDITURES IN MODERN 

TIMES 

9. The Growth of Expenditures: Wagner's so-called Law. — 

That there has been a marked increase of public expenditures 
in modern times is an undoubted fact, but interpretations of this 
phenomenon differ widely. Professor Adolph Wagner, after 
examining the available data, laid down the following " law of 
the increase of state activities " : ^ 

Comprehensive comparisons of different countries and dif- 
ferent times show that, among progressive peoples, with which 
alone we are concerned, an increase regularly takes place in the 
activity of both the central and the local governments. This 
increase is both extensive and intensive : the central and local 
governments constantly undertake new functions, while they 
perform both old and new functions more efficiently and com- 
pletely. In this way the economic needs of the people, to an 
increasing extent and in a more satisfactory fashion, are satis- 
fied by the central and local governments. The clear proof of 
this is found in the statistics which show the increased needs 
of central governments and local political units. 

10. A General Survey and Interpretation of the Facts: by- 
Professor F. S. Nitti. — The increase of public expenditures 
has been so striking as to attract the attention of many writers,^ 

1 Grundlegung der politischen Oekonomie, Bk. VI, ch. 3 (third edition, 1893). 

2 Besides Wagner and Nitti, the subject has been treated by Leroy-Beaulieu, 
Traite, Part II, Bk. I, ch. 6; Bastable, Public Finance, Bk. I, ch. 8; Adams, 
Science of Finance, Bk. I, ch. 4 ; Eheberg, Finanzwissenschaft, § 23 ; Ely, Evolu- 
tion of Industrial Society, 315-330. 

32 



INCREASE OF PUBLIC EXPENDITURES 



33 



but no one has discussed it more instructively than Professor 
Nitti/ of the University of Naples : 

As a matter of historical fact it cannot be disputed that the 
budgets of all countries show a continuous increase. France 
has been longer under a unified government than other Euro- 
pean countries, and it is easier to follow changes in the French 
budget than in those of other nations. Now the French budget 
has steadily grown ; the ordinary public revenue, stated in 
millions of francs, has been as follows : 



Year 

1243 
1300 

1364 
1422 
149 1 

15 15 
1560 



Revenue 

• 3-7 

• 5-5 



13.6 

44.8 
72.8 
84.0 



Year 
1607 
1648 
1683 

1715 
1756 
1789 



Revenue 
90.8 
184.0 
226.0 
266.0 
253.0 
47S-0 



We shall learn later on how far this increase is real, and how 
far it is merely nominal ; for the present we are concerned with 
the fact that the figures show a noteworthy increase which 
becomes still more serious after 1789. If we continue our com- 
putation based upon the official documents, we shall perceive 
that the most extraordinary increase occurred in the nineteenth 
century : 

(In millions of francs) 



Year 
1798 
1810 
1830 
1850 
i860 



Expenditure 

750 
1,007 
1,095 

1,473 
2,084 



Year 
1875 
1880 
1892 
1896 
1901' 



Expenditure 
. 2,209 
. 2,760 

• 3>343 
. 3,400 

• 3,554 



England, by its geographical position, historical conditions, 
and the character of its inhabitants, has had forms of govern- 
ment very different from those found in France, together with 
a greater degree of local self-government. But in Great Britain 
the increase of both central and local expenditures has been as 

^ F. S. Nitti, Principi di scienza delle finanze, 64-100 (1903). Translated with 
permission of the author. '^ Without Algerian expenses. 



34 SELECTED READINGS IN PUBLIC FINANCE 

rapid as in France. A statement of the expense of the national 
government ^ will reveal clearly this increase : 

(In millions of pounds) 

Year Amount Year Amount 

1691 3 1875 74 

1747 II 1882 85 

1797 58 1892 89 

1809 78 1898 102 

1814 (war) .... 112 1900 118 

1866 65 1902 142 

The years following 1898 are years of war and not a fair 
basis for comparison; but the budget estimates for 1903 are 
eloquent, for although they show a great decrease of war ex- 
penses, they reveal a striking increase of expenditures that will 
prove permanent. 

******* 

And in England this tendency is not confined to the national 
government. The expenses of the local governments have 
grown no less rapidly, indicating vigorous local activity. From 
1868 to 1898 the local expenses increased even more rapidly 
than those of the national government: 

(In millions of pounds) 
Year Amount Year Amount 

1868 36.5 1890 69.3 

1874 45-5 1896 ...... 91.6 

1880 62.9 1899 1 1 1.7 

Thus that country of all Europe which shows the greatest 
development of local government, England, and that one which 
shows the greatest centralization of power, France, do not differ 
materially in respect of the extraordinary increase of public ex- 
penditures. And similar results appear in other countries with 
various political or economic conditions. 

But England, it may be said, has for more than a century 
waged wars in all parts of the world — has fought Napoleon, 
and contended for colonial empire in America, Asia, and 
Africa. France, too, has had great victories and great dis- 

1 These figures are not wholly comparable. The expenses of Ireland are some- 
times excluded, and sometimes included. 



INCREASE IN PUBLIC EXPENDITURES 35 

asters, and has waged constant warfare. Perhaps, then, the 
situation is different with the countries that have followed a 
more peaceful policy — those which, on account of their small 
size or geographical situation, have less anxiety for their de- 
fense and less inclination for offensive war. Belgium, Switzer- 
land, and Sweden, small in population, but centers of culture 
and civilization, and long exempt from war, may perhaps show 
conditions that differ from those in England and France. 

In this view of the case, Belgium ought to be a happy excep- 
tion ; but her expenses have increased, none the less, even 
faster than those of France and England : ^ 

(In millions of francs) 
Year Amount Year Amount 

1835 ^7-1 ^^^^ 402.3 

1841 1 14.9 1891 402.1 

1851 118.6 1895 410.3 

1861 163.4 1899 570.4 

1871 222.5 

Switzerland, which has had no wars, which by reason of its 
small size can be a neutral state, but which is a remarkable 
center of activity and trade and a country with a democratic 
government, displays the same phenomenon of increasing pub- 
lic expenditures. From 1850 to 1896 the outlay of the Swiss 
Confederation increased as follows : 

(In millions of francs) 

Year Amount Year Amount 

1850 6.7 1880 41.0 

i860 21.9 1890 66.6 

1870 30.9 1896 79.5 

1873 23.6 1899 , 98.0 

1876 434 1900 102.7 

And the expenses of the Swiss cantons have increased even 
more than those of the Confederation. From 1886 to 1896, 

1 It is necessary to remember, however, that in Belgium the railroads are operated 
by the state. Thus the department of public works in 1835 spent 4,200,000 francs. 
In 1899 the department of railroads, post, and telegraph (its new name dating to 
1884) spent 147,800,000 francs. Nevertheless, even with the railroad expenses 
deducted, the growth of the Belgian budget has been enormous. 



36 SELECTED READINGS IN PUBLIC FINANCE 

according to official documents, the expenses of the canton of 
Vaud have increased 33 per cent; those of Geneva, by 40 per 
cent; those of Basel, by 57 per cent; and those of Zurich, 
by 91 per cent. (Professor Nitti then presents figures for Hol- 
land and Sweden, both of them peaceful states, disclosing a 
marked increase of expenditures during the last fifty or sixty 
years.) 

We can demonstrate, therefore, that the extraordinary growth 
of public outlay is not characteristic of the great states alone. 
It appears, indeed, to have no connection with the various politi- 
cal causes to which it has been attributed up to the present 
moment. 

In greater or less degree the same increase has occurred in 
all the countries of Europe and America. This is a general 
phenomenon, especially since the beginning of the nineteenth 
century. 

Germany, constituted an empire only in 1871, took over into 
the imperial budget only the expenditures for foreign affairs, 
posts and telegraphs, and the administration of the army and 
navy. Other branches of expenditure were left to the several 
states. Nevertheless the budget of the Empire has witnessed 
the following increase of its expense account:^ 

(In millions of marks) 

Year Amount Year Amount 

1874 672.8 1894 1,269.0 

1881 550-0 1897 1,255.0 

1886 „,.,.. 637.6 1900 1,960.5 

1889 ...... I,020c0 I9OI ...... 2,197.3 

The increase is enough to make one dizzy, the more so when 
we think of the enormous increase of the budgets of Prussia, 
Bavaria, Saxony, and all the other states that compose the 
Empire. 

It has been said that democracy has been the principal cause 
of the costliness of government ; but it appears that this state- 
ment lacks universal validity. Despotic or oligarchical govern- 
ments do not appear to be less inclined to spend money, under 

1 A part of this increase, perhaps some 500,000,000 marks, is merely nominal, and 
is due to the growth of what may be termed bookkeeping transactions between the 
imperial government and the various German states. — Ed. 



INCREASE OF PUBLIC EXPENDITURES 37 

modern conditions, than democratic governments. According 
to official data, the ordinary expenditures of Russia have in- 
creased as follows : 

(In millions of roubles) 
Year Amount Year Amount 

1803 109.0 i860 4380O 

1840 ..,.,. 187.0 1880 .„.,.. 793.0 

But since 1880, according to official figures, the increase of 
ordinary outlay has been still more rapid and bewildering : 

(In millions of roubles) 
Year Amount Year Amount 

1881 840.2 1895 ,,,... 1,520.8 

1890 1,056.5 1900 1,889.2 

The increase of expenditures has been extraordinary, there- 
fore, in Russia ; they have increased, at least in appearance, to 
nineteen times the figures for 1803. Consequently we cannot 
say that under absolute government there is a tendency to check 
or to decrease expenditures, as has often been remarked ; but 
it must be admitted that precisely the opposite is true. (Nitti 
then gives statistics for the United States, concerning which some 
data will be presented later, and for Japan.) 

And we cannot say that this tendency is confined to national 
governments : local governing bodies of all classes have wit- 
nessed an increase of their expenditures as rapid as that of the 
national expenditures. 

In Belgium provincial expenses rose from 5,773,680 francs in 
1840 to 16,593,000 in 1899. Those of the Belgian communes 
advanced from 90,000,000 in 1865 to 179,000,000 in 1892. 

We have already seen that in England local expenses increased 
from ;£26,ooo,ooo in 1868 to ;£9 1,000, 000 in 1896. If we take 
the budget of any large city, we shall discover the same fact. 
The City of Paris, which is like a small state, since it has more 
inhabitants than Denmark, Greece, or Norway, spends more 
than Portugal and Greece combined. Since 18 13 its expenses 
have risen as follows : 

(In millions of francs) 
Year Amount Year Amount 

J813 , 23 1887 ,257 

1869 168 1896 «.,.... 397 



38 SELECTED READINGS IN PUBLIC FINANCE 

But Paris is the capital of the richest state of continental 
Europe. . . . ' Yet cities far inferior to it, far more modest 
centers of population, cities which have lost their former impor- 
tance as capitals, show the same tendency. We possess an accu- 
rate history of the finances of Turin, pubhshed in 1901 by 
authority of the city government. This shows that expenses 
increased from 1797 to 1900 in the following manner: 

Year Expenses (in h're) Per Capita Expenses 

1797 547.300 5-88 

1825 1,204,800 1 1. 21 

1855 5,266,400 31-36 

1875 10,696,900 49.11 

1900 15,912,800 48.40 

Thus per capita local expenses have increased eightfold, 
while it is beyond question that the wealth of the people has 
not increased in the same proportion. 

It is interesting to note that, between 1797 and 1900, the-/^r 
capita expenditure for police and public health rose from i.i to 
6.44 lire ; those for public safety and justices, from 0.12 to 6.44 
lire ; those for public works, from 0.07 to 3.08 lire ; those for 
public instruction, from 0.07 to 7.74 lire. Outlay for charity 
increased slightly, from 0.84 to 1.23 lii^e ; while that for public 
worship declined from 0.16 to 0.05 lira. These figures indicate 
better than anything else could the causes which have deter- 
mined their course. 

Italy, in its turn, could not escape the general tendency. On 
the contrary it can be said that she has increased her expendi- 
tures excessively, reaching at times the extreme limits of pres- 
sure upon taxpayers. 

We cannot carry our researches back of the year i860. 
There were then as many budgets as states ; and since states 
frequently changed not only their rulers but also their territories, 
and since all central authority was lacking, investigation is use- 
less. . . . Limiting our inquiry, therefore, to the period follow- 
ing i860, we find that even in Italy the increase of public 
expenditures — central as well as local — has continued : 



INCREASE OF PUBLIC EXPENDITURES 



39 



PUBLIC EXPENDITURES IN ITALY i 





(In millions c 


f lire) 






Year 


National Government 


Provinces 




Communes 


1863 . 


. . . . 9304 . . . 


• 25.7 . 


. 


. . 223.9 


1874 . 


. . . 1,141.4 . . . 


. 78.0 . 


. 


. 368.4 


1885 . 


. . . 1,481.4 . . . 


. 98.7 . 


. 


. . 451.6 


1896 . 


. . . 1,731.5 . . . 


. 140.7 . 


. 


. 505.8 


1898 . 


. . . 1,640.8 . . . 


. II7.I . 


. . 


. . 554.0 


1900 . 


. . . . 1,654.2 . . . 


— 


-. 


. . 642.0 



In Italy, then, the increase of outlays has been continuous ; 
or, rather, we should say that there was no check to the increase 
for almost thirty years. Only after the expenses had grown 
to the extreme limit was there a sudden reaction, and then a 
slight reduction. But more recently expenditures have been on 
the increase. 

Without doubt the increase of public expenditures is general ; 
but it is necessary to inquire how far it is real, to inquire whether 
our figures are absolutely valid, and, if not, to ascertain what 
other elements need to be taken into account in order to present 
the facts in their true light. 

Professor Nitti then proceeds to consider whether this apparent 
increase of public expenditures is real. He says : 

Leon Say, in a little work which made considerable stir in 
1886,2 devoted several interesting pages to demonstrating that 
the growth of expenditures is a universal evil. Certainly no 
small alarm was aroused by the increase which occurred during 
the period when Say wrote. The expenses of all the countries 
of Europe, which amounted to 9,900,000,000 francs in 1865, had 
by 1879 exceeded 14,641,000,000. Two thirds of this increase 
was absorbed by the growth of military outlays, and one third 
by the development of public works and public education. The 
malady seemed to Say to be universal, and he fully believed that 
it was a real malady and one that was most dangerous in demo- 
cratic countries. If comparisons extending over a few years 

^ Professor Nitti explains that the figures are not in all respects satisfactory, but 
that they are drawn from the best available sources. — Ed. 

'^ This may be found in Vol. III. of Say's Finances de la France sous le 3me. 
Republique (Paris, 1900). 



40 SELECTED READINGS IN PUBLIC FINANCE 

were startling, our surprise should be still greater when we 
compare the expenditures of former centuries with those of our 
own time. Some authors, and especially the German theorists, 
who attribute an ethical quality to state action, have believed 
that from the increase of public expenditures we can draw the 
conclusion that the sphere of state action constantly increases. 
And this increase of state functions, manifested by the increase 
of expenditures, has even made Bluntschli and some others 
affirm that there exists an historical tendency toward progres- 
sive state socialism. Nothing could be less true. The increase 
of public expenditures is more apparent than real so far as the 
more remote past is concerned ; and it is only during the nine- 
teenth century that a true increase occurred, but an increase 
less marked than is supposed. 

The statistics can easily deceive us, for in economic affairs, 
as Bastiat has remarked, there is not only the *'seen," but also 
the "unseen." And in dealing with budgets showing public 
expenditures it is necessary never to stop with the *' seen." 

To determine whether the sphere of state action is greater 
now than in the past, and whether the satisfaction of collective 
wants claims an increased proportion of our wealth, our calcula- 
tion must be made in such a way as to avoid the errors into 
which people so often fall. In comparisons of past budgets 
it is necessary, in fact, to take account of the following factors : 
(i) the amount of the dues formerly paid in services or in kind ; 
(2) the extent of the country's territory at the different times 
under consideration ; (3) the population ; (4) the amount of 
wealth belonging to private individuals; (5) variations in the 
value of money. It is only in this way that comparison can 
be made ; otherwise our labors would be barren and without 
result. 

We cannot, for example, compare the finances of feudal gov- 
ernments with those of moderUo The former were based upon 
contributions in nature or in services, and upon income from 
domains ; the latter are based upon public revenues from charges 
and taxes, especially the latter. Revenue from personal services 
is to-day unimportant ; in the past it was the principal resource, 
in peace or in war, and public enterprises could not have been 
carried on without it. In feudal times, when war broke out, 



INCREASE OF PUBLIC EXPENDITURES 41 

every vassal sent to his suzerain a certain number of armed 
men. Forms of service varied very greatly, but they were 
numerous everywhere. To-day there is almost no sort of per- 
sonal service except jury duty and military service, which is foi 
a short period and undergoes constant reduction. 

In the next place, we usually speak of Germany, England, 
and France as if they had always represented the same terri- 
torial units; v/hereas the formation of great states is a com- 
paratively recent event which coincided with great geographical 
discoveries and the rise of new forms of international com- 
merce. It was a slow process of unification which brought 
about the formation of the great states of to-day. The France 
of Henry IV was not the France of to-day; and still less was 
that of Philip the Fair. And Great Britain is not what she was 
in the time of Cromwell. . . . 

And above all, the num.ber of the population is the factor 
which has changed. The nineteenth century represents a 
period of increase such as has never, perhaps, had a parallel 
in the history of the world. The actual population is much 
greater than that of former times ; never, perhaps, has the earth 
supported one half of the imm.ense population which now 
crowds its surface. Europe had at the opening of the nine- 
teenth century but one half of the inhabitants she had at the 
end of it ; and all the countries of Europe have, to a greater or 
less extent, witnessed a considerable increase in the number of 
their inhabitants. 

England, for example, is not only immensely richer than in 
former times, but is also far more populous. At about the year 
1000 A.D. the British Isles did not have, in all probability, 
3,500,000 inhabitants. England and Wales had only 5,500,000 
in 1688; 6,000,000 in 1740; and less than 9,000,000 in 1801. 
Now, according to the census of 1901, the population of Great 
Britain is 41,600,000, while that of England and Wales is 
32,500,000. 

Sweden has witnessed an undoubted increase of public 
expenditures, but her population has advanced rapidly also. 
She had hardly 900,000 inhabitants in 1570; but in 1700 she 
had 1,500,000; in 18 15, 2,500,000; and in 1900, 5,150,000. 
The population of Norway rose from 883,000 in 1800 to 



42 SELECTED READINGS IN PUBLIC FINANCE 

2,122,400 in 1898. That of Prussia advanced from 13,707,000 
inhabitants in 1800 to 31,855,000 in 1895. That of Italy grew 
from 17,000,000 in 1800 to 33,000,000 in 1900, and France, 
which according to the census of 1896 had 38,500,000 inhab- 
itants, had but 20,000,000 at the beginning of the eighteenth 
century and less than 25,000,000 at the time of the Revolution. 
Some European countries to-day have a larger population than 
all Europe possessed in the time of Charlemagne. 

But if population has advanced, wealth has increased still 
more. In Europe the annual revenue of every nation increased 
extraordinarily, to a degree almost incredible, during the nine- 
teenth century ; and the same is true of the United States of 
America. . . . The improvements in the technique of industry 
have been so great that the prevailing low prices of comm.odities 
could coincide with higher wages for labor. Certain countries 
in which the increase of wealth has been greatest, as Sweden, 
offer us the possibility of witnessing the wealth of each inhab- 
itant grow more rapidly than his contributions to the support of 
the central and local governments. 

The revenue of the French people has advanced remarkably. 
According to the investigations of the officials administering the 
direct taxes, the revenue drawn from the land advanced from 
1,440,000,000 francs in 1791 to 4,671,000,000 francs in 1879. 
Revenues from personal property, which Delai d'Agier estimated 
at 1,050,000,000 francs in 1791, were, according to Wolowski, 
about 6,000,000,000 francs in 1881. Later calculations have 
shown a very rapid increase. . . . 

Thus the increase of wealth in the most progressive countries 
has been such that the growth of public expenditures, startUng 
as it is, does not greatly exceed it. Doubtless what we have 
said of Sweden, and what we could say of Great Britain, the 
United States, Germany, Switzerland, Belgium, and other rich 
countries, cannot be said of some countries in which it has actu- 
ally happened that public expenditures have grown faster than 
the wealth of the inhabitants. 

Let us continue, then, to study the growth of expenditures 
not only in its external features but in its economic reality. In 
proportion to their wealth, do the citizens contribute more to the 
support of government to-day, or did they contribute more in 



INCREASE OF PUBLIC EXPENDITURES 43 

former times ? That is the question which we are considering ; 
for it is of little consequence, in fact, to know if the mere quan- 
tity of money which the citizens contribute is greater or less 
than formerly. 

Now all calculations agree in showing that money has lost 
no small part of its purchasing power. Money is worth less 
than formerly because with the same quantity of it one cannot 
purchase as much as in former times. . . . 

During many centuries kings and their governments made 
continual alterations in their coinages, reducing the amount of 
metal which the coins contained while pretending to keep them 
intact. The livre of Charlemagne's time was actually a pound 
of silver, and it was only by successive debasements that it was 
reduced to the French livre and Italian lira of five grams. . . . 

But we can study these changes and calculate them without 
difficulty. A more troublesome problem arises from the fact 
that not only have coins retaining the same names contained a 
smaller quantity of metal, but that also the purchasing power 
of the metal has fallen. In the time of Charlemagne, a given 
quantity of metal was worth nine times as much as it is to-day, 
that is, it would exchange for nine times as many commodities 
as at present. In the time of Charles VIII it was six times as 
valuable as at present ; and in the middle of the eighteenth cen- 
tury three times as valuable. Thus a Frenchman who, in the 
time of Charles VIII, owed one franc in the money of the time, 

owed in reality six francs of our money. 

******* 

If, then, we take all these elements into account, — if we recall 
the existence of various revenues from domains, take account of 
personal services, observe the changes in the territories con- 
trolled by the states, and allow for changes in wealth, popula- 
tion, and the purchasing power of money, when we compare 
present budgets with past, — we shall see that we are now con- 
tributing to the support of govern>ment, not much more than in 
the past, as has been claimed, but sometimes even less. 

There does not exist, then, and no one has proved that there 
exists, a progressive tendency toward state socialism, as some 
have maintained. Perhaps there are some countries in which, 
after taking into account all the elements above mentioned, the 



44 SELECTED READINGS IN PUBLIC FINANCE 

citizens are paying to the state proportionally less than in the 
past, although they are paying more money than formerly. In 
any case, if it is very difficult to draw comparisons with the 
remote past, we can make comparisons with times less remote. 
And it is necessary then to recognize that for a century public 
expenses, national and local, have increased much more than 
in former centuries, on account of the increased solidarity 
brought about by various causes. The increased expenditures 
of the nineteenth century are real increases ; and in some way, 
despite the extraordinary increase of wealth, the citizens bear 
burdens which continually grow heavier. 

Neither changes in the value of money nor changes in the 
income of the people explain fully the increases which appeared 
during the last half of the nineteenth century. The budgets of 
France, England, and Russia grew larger and larger, from year 
to year, by tens of millions, sometimes by hundreds. Now these 
increases are real, for in regard to them none of the qualifying 
factors above described has more than a temporary influence. 
What causes, then, produce these increases, which occasion 
such deep anxiety, and often disturb the equilibrium of the best 
balanced budgets ? The increased expenditure of the nineteenth 
century, and especially of the last half of it, is real and is due 
chiefly to : 

(a) TAe cojitinued groivth of military expeftdititres. — -The sta= 
tistics collected and published with so much care by Bloch in 
the famous book which led the Czar to call the conference at The 
Hague are certainly worthy of attention. For fifty years mili- 
tary expenditures have risen everywhere with a rapidity almost 
fantastic ; and the increase has been as great in democratic as 
in monarchical countries. Under the most liberal governments, 
in England, Switzerland, and Sweden, the outlay has taken the 
same forms as in countries ruled by absolute monarchs. In 
earlier times there were many more wars, but they cost much 
less, from such items as the**purchase of arms up to the equip- 
ment of soldiers. An iron head at the end of a long stick 
constituted a lance ; and the arms and machines of war were 
generally simple. Modern arms are almost always expensive ; 
a great steel cannon often costs more than the equipments for a 
whole battalion of soldiers in former times. The largest fleet 



INCREASE OF PUBLIC EXPENDITURES 45 

possessed by Athens cost less, perhaps, than a single modern 
warship. And then up to the Napoleonic wars there did not 
exist such vast permanent armies as we have to-day. War was 
the profession of a small number, and military 'apprenticeship 
was consequently a simpler matter. Expenses for war were 
small then, although frequent ; tjfiiere was more fighting, but the 
outlay was less. In our day peace itself costs the great powers 
more than the greatest war of antiquity ever cost. A modern 
war costs five or six billions, often more ; and if wars do not often 
occur in Europe, it is because we now stop to think of the immense 
loss of men and treasure that would be occasioned thereby. 

(b) Great public works. — It is only from about the middle of 
the nineteenth century that the use of steam and electricity as 
motor forces and the introduction of the electric telegraph upon 
a large scale occasioned a large increase of public expenditure. 
The world has never seen another transformation which could 
compare even remotely with that produced, by steam and elec- 
tricity. In this way, despite the enormous development of 
wealth in certain countries, the rate of interest has been kept 
up to a high point by reason of the demand for capital in the 
construction of public works, in addition to the demand in private 
industry which has continually assumed new and varied forms. 
In many countries the governments have constructed, upon their 
own account, in addition to public highways, which were rare 
almost everywhere at the beginning of the nineteenth century, 
tens of thousands of kilometers of railways and hundreds of 
thousands of kilometers of telegraph. 

(c) The growth of pttblic debts. — It is true that countries con- 
tract debts because they have expenses which they wish to make ; 
but it is equally true that they could not make many expenditures 
if they could not borrow. And how the debts of the various 
countries have grown! In 1800 the nominal capital of the 
French debt was J \i, 000, 000 francs ; in 1891 it was 30,170,000- 
000, and in 1897 it was 31,093,000,000. In Italy the interest on 
the recorded debt at the time the kingdom was unified was 
111,000,000 lire; the interest paid in the fiscal year 1897 was 
556,000,000 lire. There is no country which does not resort 
largely, and even excessively, to borrowing. It would seem 
that, among the great states of Europe, England alone offers a 



46 SELECTED READINGS IN PUBLIC FINANCE 

fortunate exception. She enjoys extraordinarily favorable natu- 
ral conditions, and could, without difficulty, devote a part of her 
revenues to extinguishing old debts, rather than contract new 
ones. But even she, on account of her new policy, is resorting 
in large measure to loans. 

(d) The development of all jo7'ms of social prevention. — These 
have increased the economic activity of the state. Formerly the 
state directed its action to repressing rather than preventing the 
most serious social ills that afflict society. To-day not only the 
social conditions have changed, but also the development of 
science leads us to adopt a different course. When activity was 
confined to healing or diminishing the evil, it was possible to rely 
upon individual effort; hospitals, charitable institutions, and 
asylums, created to cure or lessen the suffering which attracted 
attention and enlisted sympathy, could be created by individual 
initiative. But we do not ordinarily resort to individual effort 
when we adopt preventive methods. Thus hygienic or sanitary 
regulations, designed to prevent the evils, can only be under- 
taken by governments, central or local. General voluntary pre- 
ventive action requires too great an educational and moral 
development ever to be wholly effectual. 

(e) The ina^easing participation of all the people in public 
affairs. — Thanks to this, both national and local authorities 
have had to assume the burden of undertakings which formerly 
were not considered of general utility, or, at any rate, were 
neglected. It is true that the increase of public expenses has 
sometimes been more apparent in countries with absolute govern- 
ments than among those with liberal institutions ; but it cannot 
be denied that the latter have often led the way. Govern- 
ment of the nation by the nation, as de Remusat remarked in 
1832 in the French chamber of deputies, is not often economi- 
cal government. An absolute government has frequently cost 
the people less, and, in order to maintain itself, has been known 
to reduce taxes even to the neglect of the public service. 
To-day, when the control of the government rests with the 
people and the expenses of sovereigns are separated from the 
public expenditures and form a separate item in the budget, 
people do not look upon taxation as a loss; in greatest part 
expenditures are truly public expenditures, since they are made 



INCREASE OF PUBLIC EXPENDITURES 4/ 

in the public interest. Under the constitutional governments 
which have succeeded the older absolute forms, it is not possible 
to consider the administration as an enemy, taxation as a scourge, 
and money paid to the state as money lost. . . . F'rom any 
point of view it cannot be denied that, by having a share in 
public affairs, the masses of the people create expenses which 
formerly did not exist or existed on a very limited scale, such as 
expenses for compulsory public education, for the public health 
and social prevention, compulsory insurance, and the Hke, which 
did not previously exist . . . 

These then are the causes, the new conditions, which have 
brought about for a century a real increase of public expenditures. 

11. The Growth of Federal Expenditures in the United States. — 

The facts concerning national expenditures in this country have 
been ascertained to be as follows : ^ 

For the purposes of this article it will be desirable to exclude 
all the disbursements of the Post Office Department except the 
deficits paid out of the federal treasury, since the expenses 
defrayed from the ordinary postal revenues constitute no bur- 
den upon the taxpayers.^ Then, for different reasons, we shall 
exclude all payments upon the principal of the public debt. 
These, of course, are a burden upon the taxpayers, but they 
show great variation from year to year according to the con- 
dition of the federal finances ; and would have the effect, if 
they were included, of vitiating the comparisons that we shall 
attempt to make of the costs of running the federal govern- 
ment at various dates. By excluding this item the statistics for 
different years will be made strictly comparable, and this ad- 
vantage is so great as to justify the omission, important as it is. 

It is important first of all to secure a general view of the 
growth of expenditures since the formation of the national 
government The following table begins with the year 1792 

1 The Growth of Federal Expenditures, by C. J. Bullock. Reprinted from the 
Political Science Quarterly, XVIII, 97-1 1 1. 

2 Thus for the fiscal year 1900 we shall state the expenditures at $487,713,000, 
which includes the postal deficit. If the expenses defrayed out of departmental 
revenue were included, the total would reach $590,068,000. 



48 



SELECTED READINGS IN PUBLIC FINANCE 



because the official reports do not present separately the figures 
for 1789, 1790.. and 1791 : 

EXPENDITURES OF THE UNITED STATES ^ 



Year 



1792 
1800 
1810 
1820 
1830 
1840 
1850 
i860 
1870 
1880 
1886 
1890 
1900 
1902 



Ordinary 



15,896,000 

7,411,000 

5,311,000 

13,134,000 

13,229,000 

24,139,000 

37,165,000 

60,056,000 

164,421,000 

1 69,090,000 

191,903,000 

261,637,000 

447.553,000 

442,082,000 



Interest 



^2,373,000 

3,402,000 

3,163,000 

5,151,000 

1,912,000 

1 74,000 

3,782,000 

3,144,000 

129,235,000 

95,757,000 

50,580,000 

36,099,000 

40, 1 60,000 

29,108,000 



Total 



^8,269,000 

,10,813,000 

8,474,000 

18,285,000 

15,141,000 

24,313,000 

40,947,000 

63,200,000 

293,656,000 

264,847,000 

242,483,000 

297,736,000 

487,713,000 

471,190,000 



Per Capita 



52.04 

1. 17 
1.90 

1. 18 
1.42 
1.76 
2.01 
7.61 
5.28 
4.22 

4.75 
6.39 
5-96 



(6.80)' 



Even a cursory examination of these figures shows that the 
history of federal expenditures may be divided into five periods. 
The first of these extended from 1789 to 18 11, and reflects the 
conditions that existed during the formative period of national 
finance. The ordinary expenditures steadily increased during 
the twelve years of Federalist rule, and culminated in 1800; 
after which the economies inaugurated under the Democratic 
regime resulted in a somewhat smaller outlay.^ In a similar 

1 These figures are taken from the Report of the Secretary of the Treasury for the 
year 1901, pp. 131 and 133. They include the expenditures stated in the first and 
third columns of each page. They will be found to differ slightly from the statistics 
given on p. 113 of the same Report, For 1870, 1880, and 1890 the differences are 
due to the fact that our table excludes the item of "premiums" on debt. For 1840 
and i860 the differences are so slight as to be immaterial. For 1850 there is a dif- 
ference of $1,404,000 which is not readily explained. 

*^ The figures in the parenthesis show the per capita expenditures in specie. In- 
terest payments were always made in gold, but the ordinary expenses are stated in 
currency values. Accordingly, I have reduced the latter to terms of gold before cal- 
culating the per capita outlay. For the fiscal year 1870 the greenbacks were worth 
81 per cent of their face value. 

3 Yet in 1809 the ordinary expenditures rose to $7,414,000 on account of unusual 
outlays upon the aim/ and navy. 



INCREASE OF PUBLIC EXPENDITURES 49 

manner the annual interest charge constantly rose until the year 
1 80 1, and then slowly declined as Gallatin was able to effect 
some reduction of the principal of the public debt. Between 
1800 and 18 10 there was a marked decline in the per capita 
cost of running the government, although, if our table included 
the sums applied in reducing the debt, the total burden borne 
by the people would not show so great a decrease. 

Our second period extended from 181 2 to i860. Passing 
over the unusual conditions that prevailed during the early 
years of this epoch, we find that in 1820 both the ordinary 
expenditures and the interest charge had more than doubled, ^ 
while the per capita outlay had risen almost to the level 
reached in 1800. During the next fifteen years interest pay- 
ments rapidly decreased, since the government accomplished the 
unprecedented feat of extinguishing the whole of the debt. But 
the ordinary expenditures never returned to their former pro- 
portions, and were permanently increased as a consequence of 
the War of 18 12. In every instance in our history the prose- 
cution of a war has entailed a similar result. The total expendi- 
tures of the government steadily decreased from 1820 to 1830 
on account of reduced interest charges, and the per capita out- 
lay of the latter year fell to the remarkably low level of 18 10. 
After 1830 the ordinary expenses steadily increased, and the 
per capita cost of government gradually rose, especially after 
the Mexican War. By i860 the federal expenditures had risen 
to ^2.01 per capita, or practically the figures for the year 1800. 
Yet the increase of wealth had been such as to make the relative 
burdens of the taxpayers decidedly less than they were at the 
opening of the century. Upon the whole, during the first seventy 
years of our national existence, the federal government had been 
administered with remarkable economy, and at an expense that 
generally was considerably less than two dollars per capita. 

The third period includes the decade 1861 to 1870. Dur- 
ing the continuance of military operations the outlay of the 
government reached colossal proportions, but by 1870 conditions 
had become fairly normal so that one can form some estimate of 

1 Our table shows that interest payments rose only from ^3,163,000 in 1810 to 
$5,151,000 in 1820. But the interest charge for 1812 was $2,451,000, so that the 
statement in the text represents correctly the results of the War of 1812. 



50 



SELECTED READINGS IN PUBLIC FINANCE 



the results of the war. Our table shows that interest charges 
had mcreased by ^126,000,000; ordinary expenditures, by 
$104,000,000; and the per capita outlay, by $4.7(), when the 
figures for 1870 are reduced to a gold basis. In other words, 
the Civil War had increased by over two hundred per cent the 
per capita cost of running the federal government, even when, 
as in our tables, the payment of the principal of the debt is left 
out of account.^ And again, as in the case of the two earlier 
wars, the expenditure never afterwards fell to its former level. 

Our fourth period embraces the sixteen years that terminated 
June 30, 1886. It witnessed fhe rapid reduction of our debt 
and a corresponding decline in the annual interest charge. 
Ordinary expenditures increased but slightly up to 1880, for 
the growth of pensions was offset by reduced outlays upon the 
army and navy. As a result there was a decrease in both 
the total and the per capita cost of government. After 1880 
the growth of a large surplus revenue led to an increase of the 
ordinary expenditures, but this tendency was for some years 
more than counterbalanced by a reduction of the interest 
charge; so that in 1886 the total outlay had fallen to $242, 
483,000, which represented a per capita burden of $4.22. This 
was the lowest point ever reached by the federal expenditures 
after the Civil War.^ 

During our fifth period, which extends from 1887 down to the 
present time, the reduction of interest charges has been too slight 

1 The facts are sufficiently striking to warrant detailed analysis in the following 
table : 



Expenditures 


1860 


1870 


Civil and Miscellaneous 


^27,977,000 

16,472,000 

11,515,000 

2,991,000 

1,101,000 

3,144,000 


;^53,237,ooo 

57,656,000 

21,780,000 

3,408,000 

28,340,000 

129,235,000 


War 


Navy 

Indian 


Pensions 






Total 


^63,200,000 


^293,656,000 





2 In 1877 and 1878 the total expenditures were slightly less than they were in 
1886, but the per capita outlay was greater. 



INCREASE OF PUBLIC EXPENDITURES 51 

to offset the marked growth of expenditures in other directions ; 
so that there has been a decided increase in the cost of main- 
taining the federal government. Between 1886 and 1893 the 
aggregate expenses rose from $242,483,000 to $383,477,000, 
while the per capita outlay advanced from $4.22 to $5.78. This 
was due chiefly to congressional extravagance fostered by a 
large surplus revenue. Then came four years of industrial de- 
pression, which produced a succession of deficits and enforced 
some degree of economy. The total expenditures were reduced 
from $383,477,000 in 1893 to $365,774,000 in 1897, in which 
year the per capita outlay stood at $5.11. But then ensued 
the Spanish War, which has exerted a profound influence upon 
our finances, as upon other departments of our national life. 
In 1902 the total expenditures stood at $471,190,000, which 
represented a per capita burden of $5.96 ; while the estimates 
of the Secretary of the Treasury predict an increase of some 
forty or fifty millions for the fiscal year 1903. Once more we 
have an impressive demonstration that a war is practically cer- 
tain to leave behind the legacy of larger expenditures, and that, 
too, even when it has not entailed a material increase of the 
public debt or a considerable addition to our pension rolls. 

12. Our Increasing Public Expenditures: by T. E. Lyons.^ — 

Mr. E. T. Lyons, of the Wisconsin State Tax Commission, has 
published the following careful study of the causes that have 
increased state and local expenditures in the United States : 

One of the most significant features of civil government in 
recent years has been the rapid increase in public expenditures. 
As these expenditures are primarily met by taxation, the move- 
ment has manifested itself in a widespread complaint against 
high taxes. As citizens of Wisconsin and officers in the tax 
department, we cannot be oblivious to these complaints ; indeed, 
we are often made the target of the criticism. From the violence 
and persistence of this agitation in public and private speech and 
in our local press, it might naturally be inferred that the condition 
was confined to Wisconsin, but such is far from the case. Like 
protest has been heard in nearly every part of the country and 
particularly in the states north of Mason and Dixon's Line. 

1 An address delivered at Madison, Wis., Feb. 10, 1916. 



52 SELECTED READINGS IN PUBLIC FINANCE 

With these preliminary remarks, let us inquire : 

1. Whether puljlic expenditures have in fact increased in 
recent years, and, if so, to what extent. 

2. Whether such increase is greater and the tax burden heavier 
in Wisconsin than in other states. 

3. What sources or agencies have caused this increase ; and 

4. Whether there is any remedy for the condition. 

On the first question there need be no cavil or dispute. Public 
expenditures have increased in recent years and increased 
rapidly, if not alarmingly ; not only in this state, but in the 
several states and in the federal government as well ; not for 
one year, but for many years, — indeed for a whole generation. 
This basic fact is attested by our own experience as adminis- 
trators and taxpayers, and is confirmed by repeated investiga- 
tions made by other states and the national government. In a 
paper read at the meeting of the National Tax Association in 
San Francisco last August, the chief statistician of the Federal 
Census Bureau showed that according to statistics collected by 
that department the expenditures of the federal government had 
increased 54^ per cent from 1903 to 1913, and that during the 
same period the average increase in the expenditures for the sev- 
eral states and their political subdivisions was 105.9 P^^ ^^^^ ^o^ 
the states, 95.2 per cent for the counties, 103.2 per cent for cities 
of more than 8000 population, and 100 per cent for all other politi- 
cal subdivisions. Excluding the federal government the figures 
show an average increase of 101% per cent in the cost of govern- 
ment for all the states, counties, and municipalities in the country. 

Exactly parallel figures are not available for the state of Vv^is- 
consin, but as practically all revenue required for the support of 
government in this state is raised by taxation, a comparison 
of the total amount of taxes levied for the state and all its 
political subdivisions for the years 1903 and 1913 furnishes rea- 
sonably comparable data. The total amount of taxes levied on the 
general property of the state for 1903 was $20,776,180 as against 
$41,755,035 in T913, showing an increase of approximately 100 
per cent. These figures, however, do not include corporation 
and inheritance taxes paid directly into the state treasury, and 
if these be added the increase is 114 per cent. The 1913 tax levy 
being abnormally high, as hereinafter explained, it is believed 
that the years 1905 and 191 5 furnish a more representative com- 



INCREASE OF PUBLIC EXPENDITURES 



53 



TOTAL GOVERNMENTAL COST PAYMENTS, WITH PER CENT OF 
INCREASE, 1913 AND 1903 1 





Total Governmental Cost Payments 


Division of Government 


1913 


1903 


Per cent of 
Increase 


Total 

Federal 


^3,284,343,266 
952,600,857 
382,551,199 
385,181,760 
1,119,843,682 
444,165,7682 


$1,773,186,446 
616,739,361 
185,764,202 
197,365,827 
551,234,172 
222,082,884 


85.2 

54-5 
105.9 

95-2 
103.2 

lOO.O 


States 

Counties 

Incorporated places of 8ooo and over 
All other civil divisions (estimated) . 



parison. The total amount of taxes collected from all sources in 
1905 was $25,590,903 as against $52,574,515 for 191 5, showing 
an increase of 105^ per cent, or 4 per cent above the average 
rate of increase for the entire country. 

If further evidence of our increasing public expenditures be 
required, it may be found in the successive levies of taxes for all 
purposes in the several towns, cities, and villages of the state. 
Without exception these levies have steadily and almost uni- 
formly increased. The greatest variation was in the year 1913, 
when the increase was unusually great. But notwithstanding 
the outcry against high taxes that year and a reduction of 
$2,500,000 in the next state levy, the total amount of taxes levied 
for all purposes for 1914 exceeded those of the preceding year 
by nearly $500,000. Again, despite the vigorous campaign against 
high taxes in the fall of 19 14 and the earnest efforts of the state 
administration to hold them in check, the total tax levy on the 
general property of the state for 191 5 exceeds that of any pre- 
ceding year by $1,057,000. The obvious explanation is that 
the reduction in the state levies of 1914 and 191 5 was more than 
offset by increase in the local levies. These figures effectually 
refute the charge that increased expenses are always caused by 
the state government, and suggest the inquiry whether the acme 



^ From address of Chief Statistician of Census Bureau delivered before the 
National Tax Association at San Francisco, Aug. 12, 1915. 

2 Includes ^126,792,995 actual governmental cost payments of incorporated 
places of 2500 to 8000 population. 



54 SELECTED READINGS IN PUBLIC FINANCE 

of high taxes has yet been reached. They also furnish the 
answer to the first question considered and conclusively show 
that public expenditures have practically doubled in this state 
and throughout the United States during the last decade. 

Has Such Increase been Greater and is the Tax Burden 
Heavier in Wisconsin than in Other States ? 

In the discussion of this question much misunderstanding has 
arisen from confusing appropriations, levies, and expenditures 
and by limiting the inquiry to a single unit of government, such 
as the state. A moment's reflection will show that neither expen- 
ditures nor taxes can be accurately measured by appropriations 
or levies of a state, county, or any other single unit of govern- 
ment. The defect in appropriations is that they include agency 
and trust transactions between the state and its minor political 
subdivisions and cover substantial amounts representing mere 
book transfers vv^hich are neither levied, collected, nor expended 
for state purposes. To illustrate : when a new university or 
normal-school building is required, the legislature makes an 
appropriation for the purpose and the money when collected is 
credited to the general fund, but when required for actual use is 
transferred to the university or normal-school fund as the case 
may be, thus appearing as a receipt and disbursement of both 
funds. Obviously the receipt occurs when the money is collected 
by taxation or otherwise and disbursement when the money is 
paid out for actual construction. According to a report of state 
finances issued by the board of public affairs on the first of 
January last, the amount of these transfers appearing on the 
state books alone for 1913 was over $3,000,000 and the transfers 
between the state, the counties, and their municipal subdivisions, 
including school districts, exceeded $30,000,000. These transfers 
from one fund to another do not represent either taxes or 
expenditures in the proper sense. 

Similarly the amount of the levy in any given year is affected 
by the cash balance on hand at the end of the preceding fiscal 
year and the amount of aid extended to local districts. This is 
well illustrated in the case of the state by the levy of $2,566,711 
for 1912 as against $7,655,318 for 1913. There was a large 
balance in the treasury on the first of July, 1912, which made 



INCREASE OF PUBLIC EXPENDITURES 55 

the low levy for that year possible, while the empty condition 
of the treasury on the first of July and the call of new legislation 
for state aid to highways required a high levy for 1913. An 
average of the levies for both years does not materially differ 
from the levies of the preceding and following years. 

Comparisons of levies for state purposes in different states 
are equally misleading, because of the difference in the distribu- 
tion of revenues derived from other sources, and in the functions 
performed by dift'erent state governments. For example, there 
is paid into the state treasury of the state of New York annually 
over $9,000,000 from liquor licenses and over $2,500,000 in Ohio, 
whereas Wisconsin derives no revenue at all from these sources. 
On the other hand, the state absorbs nearly all corporation taxes 
in Wisconsin, while they are distributed to the counties and 
local districts in many other states. Of course the levy on the 
general property of the state is reduced in' proportion to the 
amount derived from other sources, and when this latter item 
varies the comparison fails. Again, Wisconsin assumes func- 
tions and renders services as a state which are performed by the 
counties and local subdivisions in many other states. This point 
is well illustrated by a comparison with Iowa, where the total 
tax burden is approximately the same as in Wisconsin. 

In 191 3 the expenditure for state purposes in Iowa was only 
about one half as much as in Wisconsin ; but expenditure for 
county purposes in Iowa was double that of Wisconsin, and the 
per capita expenditure for local government was also greater. 
Obviously comparison of state or county expenditures alone 
would not show the true relation. 

This diversity in the distribution of revenue derived and 
functions performed by single governmental units makes all 
comparisons based upon either their levies or expenditures mis- 
leading. In every state the entire cost of government — state, 
county, and municipal — ultimately falls upon the taxpayers, and 
they are concerned with the amount of the total burden, not in 
how it is distributed. If all political units, from the highest to 
the lowest, be taken into account and the transfers and duplica- 
tions eliminated, either appropriations or levies may well be 
compared, but not otherwise. The actual expenditure, however, 
is the final test, and this should include all the political sub- 
divisions in order to form a just basis of comparison. 



56 



SELECTED READINGS IN PUBLIC FINANCE 



Fortunately the last federal census furnishes information of 
this character for all the states and their political subdivisions 
containing 2500 inhabitants and upwards, together with a reason- 
ably reliable estimate for the municipal districts having a smaller 
population. These statistics were compiled by an impartial body 
on the same basis of accounting and classification and, therefore, 
afford the best available basis for comparison. Separate bulle- 
tins containing the results of these investigations have been 
made by states, counties, and all municipal districts containing 
more than 2500 population, with an abstract combining the 
results of the three. They contain a comparison of the expendi- 
tures for 1903 and 1913, showing the total and per capita ex- 
penditures for state, county, and municipal purposes and the 
aggregate of all three, together with a percentage of increase in 
the case of states. The expenditures are further classified ac- 
cording to the main functions of government, showing the 
amount spent for each purpose. Most of the figures hereinbefore 
given and all that follow are taken from these sources. 

PER CAPITA COST OF GOVERNMENT FOR STATES, COUNTIES, 
AND CITIES OF 2500 POPULATION AND OVER, FOR 1913 



States 



Counties 



Cities 



Per Capita 
IN Cities 



Per Capita 
BY Whole 
Population 



Average for all states 
Alabama . . . . . 
North Carolina . . . 

Tennessee 

Indiana 

Illinois 

Iowa 

Michigan 

Minnesota 

Wisconsin 

Ohio ... . ... . 

Missouri . . . . . 

New Jersey . . . . 

Colorado 

New York 

Nebraska 

California 



^3-95 
2.77 
1.46 
1.84 
2.92 
2.21 
2.69 

4-30 
6.66 

5-27 
2.63 
2.27 
4.88 
2.46 

6-93 
2.90 
7.98 



$4.49 

2-33 
2.99 

444 

4.17 

2-57 
7-25 
3-05 
4.07 

3-27 
5-03 
4.10 
5.10 
9.19 
4.09 

5-32 
20.67 



$27.29 

14-15 

18.02 

21-53 
18.66 

23-54 
20.22 
24.18 
26.82 
19.47 
24.05 
27.46 
24-53 
30-94 
39-49 
47-25 
49-74 



^35-73 
19.25 
22.47 
27.81 

25-75 
28.32 
30.16 
31-53 
37-55 
28.11 

31-71 
33-83 
34-51 
42.59 

50-51 
55-47 
78.39 



520.73 
7.69 
7. II 
10.78 
15-30 
19-57 
16.41 

19-13 
21.98 
17.21 
21.54 
17-47 
28.33 
25.68 
40.36 
20.55 
56-73 



INCREASE OF PUBLIC EXPENDITURES 57 

It is impractical to give either the total expenditure or per 
capita cost of government for all the states within the limits 
of this paper. The comparison is, therefore, confined to the 
average for all the states and for two Southern states, one 
Eastern, and one Western state, and the five North-central 
states, including Wisconsin. The states compared are Alabama, 
North Carolina, Iowa, Wisconsin, Illinois, Michigan, Minnesota, 
New York, and California. Tables are appended showing the 
per capita cost of government by states, counties, and munici- 
palities of 2500 population and upward, and the total per capita 
cost for all these purposes for the average of all the states and 
for each of the states named separately ; also the per capita 
cost for the five principal governmental functions of general 
administration ; protection of person and property, construction 
of highways, charitable and penal institutions, and education. 

State Expenditures 

Taking up the increase in expenditures for state purposes first, 
the census bulletin referred to shows an average increase of 
105.9 P^^ c^^t in the cost of state government for all the states 
from 1903 to 1913. Expenditures for state purposes in Wis- 
consin increased from $5,306,543 to $12,741,646, or 140 per cent, 
in the same period. The bulletin issued by the state board of 
public affairs shows this increase to be 150 per cent. In either 
case it will be observed that the cost of state government alone 
increased more rapidly in Wisconsin than the average for all the 
states. There is a great diversity between different states in 
different sections of the country in this respect. In the less 
progressive states of the South the increase is very slight com- 
pared with the richer and more prosperous states of the North. 
The increase in the rapidly growing states of the Rocky Moun- 
tain and Pacific Slope region is naturally very great, but neither 
of these sections can fairly be compared with Wisconsin. In 
many of the Northern states the increase was more rapid than 
in Wisconsin. For instance, from 1903 to 1913 state expenses 
in Maine increased 166 per cent ; in Vermont, 138 per cent ; in 
Connecticut, 147 per cent ; in New Jersey, 149 per cent ; in 
New York, 200 per cent ; and in North Dakota, 233 per cent. 

Comparing Wisconsin with the surrounding states it appears 



58 SELECTED READINGS IN PUBLIC FINANCE 

that the increase in the cost of state government was much more 
rapid than in Iowa and Illinois and about midway between the 
increase in Michigan and Minnesota. During the decade in 
question state expenses increased 91 per cent in Iowa, 95 per 
cent in Illinois, 144 in Michigan, 140 in Wisconsin, and 155 in 
Minnesota. 

The census figures further classify expenses for state purposes 
according to population, showing the average per capita cost to 
be $3.95 for all the states of the Union. On the same basis the 
per capita cost of state government in Michigan is $4.30 ; in 
Wisconsin, $5.27 ; and in Minnesota, $6.66. Generally speaking, 
the per capita cost is higher in the Northern than in the Southern 
states and highest of all in the sparsely settled states of the 
Rocky Mountains and Pacific Slope. The range is from $1.47 
in South Carolina to $10.46 in Nevada, with a per capita cost 
of $6.93 in New York, notwithstanding its limited area and 
enormous population of nearly ten millions. 

Subventions and Grants 

The figures used in arriving at the above per capita cost of 
state government include in each case grants to local sub- 
divisions for the support of schools, construction of highways, 
and other forms of local aid. The census figures show the total 
and per capita expenditure for each of these purposes, and the 
noteworthy feature of this classification is the exceptionally 
large expenditure of Wisconsin for state aid to education. Of 
the forty-eight states of the Union, Wisconsin ranks second, or 
next to New York, in the total amount expended for educational 
purposes, our expenditure being $4,047,059 in 191 3 as compared 
with New York's maximum of $5,491,170. The average per 
capita expenditure for education for all the state governments is 
57 cents as against a per capita expenditure of 50 cents in 
Illinois, 72 in Iowa, 'j'}) in Michigan, $1.15 in Minnesota, and 
$1.67 in Wisconsin. This far exceeds the per capita contribution 
of New York for educational purposes and is only equaled by 
Utah and Nevada. Of course the high per capita expenditure 
of these two Western states is due to their great area and small 
population. This liberal aid to education given by Wisconsin 
and the construction of a new capitol building go far to 



INCREASE OF PUBLIC EXPENDITURES 59 

explain our hi^h per capita cost of state government. The 
amount expended for all other purposes compares favorably 
with the average of other states. It would seem, therefore, that 
our one extravagance, if any, is education. 

The figures last quoted represent state expenditures only and 
do not cover expenditures for other political subdivftions, such 
as counties, towns, cities, and villages. Comparisons on this 
basis are, therefore, less trustworthy than where all public 
expenditures are included for reasons given above. The varying 
amount of aid given by the states to local districts in the form 
of subventions and grants further impairs the value of the com- 
parison of state, expenditure alone, as these items do not fairly 
represent the cost of state government. To illustrate : in the 
comparison above given, based upon the census returns, the 
expenditures of Wisconsin for state purposes for the year 1913 
were given at $12,741,646, but $3,415,809 of this amount was re- 
turned to the local districts for the support of schools, construc- 
tion of highways, and other local aid, leaving only $9,325,837 
as the expenditure for state government proper. The bulletin 
issued by the board of public affairs makes this item half a 
million less. In 1914, out of a total state expenditure of $13,964,- 
163, the state returned $4,190,226, or 30 per cent, to the localities. 
The aggregate amount of these subventions and grants returned 
to the local districts from 1902 to 1912, inclusive, exceeded the 
total amount of taxes levied for state purposes during that 
period. In other words, taking this period as a whole, the state 
returned to the localities more money than it received from them 
in taxation. This means that all state expenses were met by the 
corporation and inheritance taxes and department earnings. 

Expenditures for All Governmental Units 

As already shown, the per capita cost of state government in 
Wisconsin is $5.27 as against an average of $3.95 throughout the 
United States, but the per capita cost of county government is 
'$3.37 in Wisconsin as against an average of $4.49 for the United 
States, and the per capita cost of municipal government is only 
$19.47 in Wisconsin as against an average of $27.29 for all the 
states. Combining the three items representing cost of govern- 
ment in these separate units gives a total of $28.11 as the per 



6o SELECTED READINGS IN PUBLIC FINANCE 

capita cost of government for Wisconsin as against an average 
of $35.73 for the entire United States. On this basis the total 
per capita cost of government for Illinois is $28.32 ; for Iowa, 
$30.16; for Michigan, $31.53; and for Minnesota, $37.55. It 
appears, therefore, that the total cost of government to an 
urban resident of Wisconsin is $7.62 less than for the average 
citizen of the United States ; 21 cents less than for a citizen of 
Illinois ; $2.05 less than for a citizen of Iowa ; $3.42 less than 
for a citizen of Michigan; and $9.44 less than for a citizen of 
Minnesota. The cost of government to a resident of Wisconsin 
is $20 less than to a resident of New York and only two fifths of 
what it costs a resident of California. 

These results are arrived at by adding together the total cost 
of government for states, counties, and cities containing more 
than 2500 population, and dividing this sum by the population 
of the districts involved for the reason that the residents of 
these cities must bear all three burdens. The census bureau, 
however, arrives at the total per capita cost by dividing the sum 
of the expenditures of states, counties, and cities containing 
more than 2500 population by the total population of the 
country. Obviously by including the population of districts 
having less than 2500 inhabitants in the divisor and excluding 
the expenditures of these districts from the dividend, a lower 
per capita cost is produced. The relative position of Wisconsin, 
however, remains practically the same, and on this basis the 
per capita cost of all government in Wisconsin is $17.21 as 
against an average of $20.73 ^^^ ^^^ entire United States, $16.41 
for the state of Iowa, $19.13 for Michigan, $19.57 ^o^ Illinois, and 
$21.98 for Minnesota. This method of computation makes the per 
capita cost of government in Iowa 80 cents less than in Wisconsin, 
whereas the per capita cost was $2.08 more according to the other 
method. The difference is readily explained by the relatively 
larger rural population of Iowa as compared with Wisconsin. 

The census bureau further classifies the cost of government 
by ten main functions and gives the per capita cost for each. 
As some of these are relatively unimportant, this statement is 
confined to the expenditures for the five main functions calling 
for the heaviest outlay ; namely, general government, protection 
of person and property, construction of highways, charities and 
correction, and education. 



INCREASE OF PUBLIC EXPENDITURES 



6l 



PER CAPITA COST OF GOVERNMENT FOR STATES, COUNTIES, 

AND CITIES OF 2500 POPULATION AND OVER FOR PRINCIPAL 

GOVERNMENTAL FUNCTIONS 





General 

Gov- 
ernment 


Protection 
OF Person 
AND Prop- 
erty 


Highways 


Charities 
and Hos- 
pitals 


Education 


Average for all states 

Alabama 

North Carolina . . . 

Tennessee 

Indiana 

Illinois 

Iowa 

Michigan 

Minnesota 

Wisconsin 

Ohio 

Missouri 

New Jersey 

Colorado 

New York 

Nebraska 

California 


$2.l8 

.98 

.68 

•99 

2.05 

2.34 
1.85 
2.09 
2.09 
1.77 
2.41 
2.10 
2.67 
4-65 
3-31 
2.47 
4.40 


$1.86 

•47 

•38 

•70 

1.32 

2.65 

.96 

1.56 

1-93 
1.60 
1.79 

1.79 
2.78 
1.80 

4-03 
.98 

3-59 


$1.64 
.85 

•55 

.85 

1.50 

•95 

1.50 

1.63 

i^i3 
1. 18 
1.70 

1-55 
2.18 
2.41 

2-45 

1.69 
3^51 


$1.63 
1.07 

.66 
1. 14 

1^37 
1.52 
1.84 
1.50 
2.08 
1.92 
1.79 
1.26 
1.85 

1-43 

2.77 
1. 00 
2.68 


^4-37 
1.97 
2.14 
2.74 

3^99 
3-78 
3-45 
5-27 
5^29 
5^24 
3^61 
3-37 
7-2S 
5-03 
6.15 

3-" 

4.46 



On this basis the per capita expenditure for general govern- 
ment is $1.77 in Wisconsin as against an average of $2.18 for 
the entire United States, $1.85 in Iowa, $2.09 each in Michigan 
and Minnesota, and $2.34 in Illinois. The per capita cost for 
protection of person and property is $1.60 in Wisconsin as 
against an average of $1.86 for the entire United States, 96 
cents in Iowa, $1.56 in Michigan, $1.93 in Minnesota, and $2.65 
in Illinois. In 1913 the per capita expenditure for highway 
purposes was $1.18 in Wisconsin as compared with an average of 
$1.64 throughout the United States. The per capita cost for the 
support of charitable and penal institutions was $1.92 in Wiscon- 
sin as against an average of $1.63 for the United States, $1.50 in 
Michigan, $1.52 in Illinois, $1.84 in Iowa, and $2.08 in Minnesota. 
The per capita cost of education was $5.24 in Wisconsin as against 
an average of $4.37 for the entire United States, $3.45 in Iowa, 
$3.78 in Illinois, $5.27 in Michigan, and $5.29 in Minnesota. 



62 SELECTED READINGS IN PUBLIC FINANCE 

It appears, therefore, that the per capita cost for all the main 
functions of government is less in Wisconsin than the average 
cost for the same service throughout the United States except 
in the case of charities and education. Observe that while our 
state per capita expenditure for education was nearly three times 
the average for the entire country, the comparison is much more 
favorable when the counties and local districts are included, the 
average per capita cost for all educational purposes in Wisconsin 
being $5.24 as against an average of $4.37 throughout the United 
States. 

The one defect in the census figures is the fact that they do 
not include local districts containing less than 2500 population, 
but as these districts represent less than 15 per cent of the total 
cost of government, and expenditures are very moderate in the 
rural districts of Wisconsin, except in a few northern towns, 
the omission would count rather against us than in our favor. 
The bulletin issued by the state board of public affairs shows the 
expenditures for the year 1912 by the different groups of 
political subdivisions in this state. Of more than $54,000,- 
000 expended for public purposes that year, the 286 villages 
spent only $1,522,128 and the 1216 towns only $5,708,940, while 
the 71 counties spent $7,916,255 and the 128 cities $19,529,523. 
The expenditure for strictly state purposes for that year was 
$7,738,504, while the expenditure of the city of Milwaukee alone 
was $8,456,883, or three fourths of a million more than the ex- 
penditures of the 71 counties, nearly one million more than the 
cost of state government, and nearly three millions more than 
the cost of maintaining 1216 towns. Public expenses have 
increased since that time, but it is believed that the ratio 
between these different groups of political subdivisions has not 
materially changed. On the contrary, it is probable that the 
expense of city government has relatively increased as compared 
with that of the smaller villages and rural towns. The farmer 
in the older and better settled portions of the state is your true 
economist. He spends little for public purposes and gets little 
in return. Whether his course in this respect is wise or unwise, 
it is at least consistent. The resident of the city who complains 
of high taxes can generally look to his own community for the 
cause. 



INCREASE OF PUBLIC EXPENDITURES 63 

Taxes in Specific Districts not Comparable 

We are frequently confronted by comparison of taxes in Wis- 
consin with those of adjoining states. Because the tax on a 
specific description of property in Iowa or Minnesota is less than 
the tax on a property of like value in Wisconsin, it is assumed 
that our taxes generally are higher than in these other states, 
whereas the only thing these facts prove is that taxes in a 
particular district in Minnesota or Iowa are less than in a 
particular district in Wisconsin. The fallacy of this reasoning 
is shown by the fact that like disparity may be found within 
the boundaries of the same state or county. To illustrate : the 
per capita cost of government in the city of Berlin as shown by 
the federal census is $10.96 as against $32 in the city of Ripon. 
Again, the per capita cost of government in De Pere is $11.79 
as against a per capita cost of $37.52 in Richland Center. The 
town of Eau Galle in Dunn County has a tax rate of less than 
7 mills as against 21 mills in the town of New Haven in the 
same county, and the tax rate in the town of Highland, Doug- 
las County, is 14 mills as against a tax rate of 43 mills in 
the town of Brule in the same county. Of course these isolated 
cases have no significance except as showing that one district 
raises more taxes and spends more money than another. Num- 
berless instances could be cited of heavier tax burdens in specific 
districts of adjoining states as compared with similar districts in 
Wisconsin, but they would be equally void of probative force. 

It is true that the average tax rate for both Iowa and Illinois 
is less than that in Wisconsin, for the reason that with sub- 
stantially the same population and area to care for, Iowa has 
approximately twice as much wealth, and Illinois, with the same 
area and two and one-half times the population, has nearly five 
times our wealth. Public expenditure bears some relation to 
both population and wealth, and the tax rate would naturally be 
lower in these states than in Wisconsin. The two states naturally 
comparable with Wisconsin in respect to climate, topography, 
character of population, and industrial conditions are Michigan 
and Minnesota, and the tax burden in this state is lighter than in 
either of these two. As already shown, the per capita tax burden 
in Wisconsin is approximately the same as that in Iowa and is 
lower than that of any other adjoining state. 



64 SELECTED READINGS IN PUBLIC FINANCE 

The foregoing figures furnish conclusive answer to the second 
question considered and show that while state expenditures alone 
have increased more rapidly in Wisconsin in the last ten years 
than in the average state of the Union, when all taxes are con- 
sidered, the increase is found to be just about the same as the 
average increase for the United States ; and that the cost of 
government in Wisconsin, measured by unit of population, is 
less than that of the average state, less than that of any 
adjoining state, and much less than the average for all the 
Northern states. 

Cause of Increased Taxes 

The foregoing figures not only prove that public expenditures 
have rapidly increased in the last decade, but that the tendency 
is still upward. This does not mean that in each individual 
district the taxes of any given year are always higher than those 
of the preceding year ; but it does mean that, considering this 
state or the United States as a whole, public expenditures 
steadily increase from year to year with the certainty and uni- 
formity of a natural law. So regular is this movement that the 
aggregate of all appropriations, levies, and expenditures over any 
considerable area all tell the same tale. The very uniformity 
of the movement in the face of vigorous opposition implies that 
there must be a compelling necessity somewhere. Let us briefly 
inquire what that necessity is. 

The first explanation of the increased cost of government to 
suggest itself is the increased cpst of everything required to 
carry it on. In last analysis increase in cost of government 
results from the same cause as increase in the cost of private 
business. The government purchases supplies and employs labor. 
The cost of these items has increased in private business ; 
why should it not do so in public afifairs ? Railroad managers, 
manufacturers, merchants, and business men of all classes testify 
to the increased cost of conducting business and the narrowing 
margin between net and gross earnings. Private families have 
the same experience. Can you supply your table, procure cloth- 
ing, provide fuel, and maintain your household for the same 
amount that it cost ten or twenty years ago ? If not, why 
expect the public to do so ? In this respect a growing state is 
not unlike a growing family. Its expenses naturally and in- 



INCREASE OF PUBLIC EXPENDITURES 65 

evitably increase even for the same class and amount of service. 
But a second and more important consideration is that public 
service has changed in character and enormously increased in 
amount. People are no longer content with the facilities fur- 
nished a decade or score of years ago. They demand and 
actually have more and better streets and sidewalks, larger parks 
and playgrounds, finer and more expensive public buildings, 
brighter lights and purer water, more and better health, police 
and fire protection, and more and better facilities and protection 
of every kind. 

The modern budget covers many items for community benefit 
unknown a century ago. The present-day tax bill includes items 
for medical service, life insurance, old-age pensions, school 
tuition, and constitutes a license to call on any department of 
government for any and all kinds of aid and protection. These 
things cannot be had without money. If they could, self-interest 
would promptly induce public officers to secure them. No one 
considers high taxes desirable in and of themselves, and no 
public officer would voluntarily increase them. He well realizes 
that high taxes are not popular and does not enjoy the criticism 
they provoke. Nevertheless taxes constantly increase with the in- 
creasing complexity of civilization as if in obedience to a natural 
law. How is the phenomenon to be explained? Why must we 
all have what nobody wants? The obvious answer is that, while 
nobody wants high taxes, practically everybody wants the things 
that make taxes high. For ten months in the year some class of the 
community, the promoter, the educator, the philanthropist, the 
aesthete, or the pleasure seeker each, after his kind, clamors for 
increased expenditure, and scarce a voice is heard in protest until 
tax-payment time arrives. Then there is a loud outcry, and, except 
in partisan circles, the matter again subsides for another year. 

Herein lies the explanation of high taxes. First, the increased 
cost of labor and material and of all facilities required for 
conducting public business ; second, the increased activity of 
government in many fields. Whether all these activities are 
necessary or worth-while is for the people themselves and their 
legislative representatives to decide. It is not a problem of tax 
administration ; but if they insist upon the service, the increased 
cost must follow as a necessary consequence. 

A simple illustration with which you are all familiar is found 



66 SELECTED READINGS IN PUBLIC FINANCE 

in the history of the tax commission, which was created as a 
permanent body in 1899. Its sole duty at that time was to 
supervise local assessments and study the tax problem. In 
190.1 the commission was made a state board of assessment and 
given supervision over county supervisors of assessment. The 
assessment of steam railroads was added in 1903. In addition 
to these duties, which the commission still performs, it is now 
required to assess the property of street railways and electric- 
light companies operating in connection therewith ; supervise 
the assessment of utihties furnishing light, heat, and power; 
direct reassessments of towns, cities, and villages on proper show- 
ing ; entertain and determine appeals from equalizations by 
county boards ; collect statistics and prescribe forms for local 
tax officials ; audit the accounts of towns, cities, and villages 
Jand install a system of public accounting at their request ; super- 
vise the administration of the income-tax law ; directly assess 
the incomes of all corporations and joint-stock companies, and 
bear the entire expense of supervising the property tax, which 
formerly cost the counties $54,000 a year. A mere comparison 
of the duties now imposed upon the commission with those of 
a dozen years ago sufficiently shows the fallacy of comparing ex- 
pense of administration at that time with the present. As a matter 
of fact, the cost for the same service which the commission per- 
formed twelve years ago is not materially greater now than It was 
then, while the duties subsequently imposed by the income-tax 
act annually yield approximately $200,000 to the state, or more 
than the entire cost of all activities of the commission. 

A study of the various acts relating to the railroad commission 
will show the same growth. That body was created to regulate 
rates on steam railroads. Afterwards its jurisdiction was ex- 
tended to street railways ; then to public utilities such as electric- 
light, water, and power companies. Later still it was charged 
with the duty of prescribing the character of service for all 
public utilities and of supervising the issue of their securities ; 
and in 1913 the administration of the water-power act and the 
Blue Sky law was added. Criticism of the commission because it 
cannot perform these increased duties now at the same expense 
as when first created is as unreasonable as to deny a farmer a 
telephone or silo in 1916 because he had neither of these articles 
a dozen years ago. 



INCREASE OF PUBLIC EXPENDITURES 6t 

In the meantime numerous other boards and commissions have 
either been created or had their powers enlarged ; but notwith- 
standing their reputed number, the entire cost of all administra- 
tive departments, with the executive, judicial, and legislative 
thrown in, was less than 3 per cent of the total expenditure for 
public purposes in 191 4, and the cost of this one item of general 
administration in Wisconsin is materially below the average for 
all the states of the Union and less than for either of the 
adjoining states. 

Under this twofold pressure of increase in the cost of every- 
thing employed or used in conducting public business, whether 
in the form of service or supplies, and in the volume and char- 
acter of services rendered, increase in the cost of government 
was inevitable, and it has taken place not only in this state, but 
throughout the United States and in nearly every town, county, 
city, and village within its borders. 

Is THERE ANY ReMEDY FOR THIS CONDITION, AND, IF SO, 
WHAT IS IT ? 

This question has received earnest attention in recent years, 
but thus far without definite result. It was hoped that the 
widespread agitation against increase in taxes and the introduc- 
tion of the uniform system of accounting, making comparison 
of the expenditures of different municipalities possible, might 
operate as a check, but while these aids have been enlightening 
and valuable, they have not proved a panacea. The only remedy 
promising positive relief is by closer limitation of the taxing 
and borrowing powers, and this is advanced with hesitation. 
Many of the states already have tax-limitation laws, but few 
of them have proved effective. In nearly all cases the limit 
prescribed is so high and the terms of the statutes so inflexible 
as to render them practically useless. 

Our own law fairly illustrates the situation. Every school 
district in the state is authorized to levy a tax of 2 per cent 
of its assessed valuation for school purposes. The electors of 
every town are authorized to levy. an additional tax of i^ per 
cent of the assessed valuation for town purposes, and the same 
limitations apply to villages and cities not operating under the 
general charter law. In each of these municipalities an addi- 
tional tax of I per cent of the assessed valuation may be imposed 



68 



SELECTED READINGS IN PUBLIC FINANCE 



for county purposes, and cities operating under the general 
charter law may levy 3>4 per cent of the assessed valuation for 
all purposes. It will be observed that there is no limit as to the 
levy for state purposes, nor for the amount that may be levied 
to pay preexisting indebtedness. It follows, therefore, that any 
municipality of this state may impose a tax ranging from 3^ 
to 5 per cent of the assessed valuation of the property within 
its borders every year. 

When it is considered that the average rate of income from 
property exclusive of personal service is less than 5 per cent and 
that the average rate of taxation of general property of the 
state has never exceeded 14 mills, the uselessness of our present 
limitations is apparent. The only object of limitation of the 
tax rate is to protect property owners against reckless or ex- 
travagant expenditures by irresponsible electors and governing 
boards, and it is obvious that our present law affords no protec- 
tion in that respect. The fact that so few municipalities avail 
themselves of the full license granted sufficiently indicates that 
these limitations can be materially reduced without prejudice 
to any taxing district. They can at least be made low enough 
to prevent extravagance and abuse. The remedy has the merit 
of being simple and direct, besides affording a check on extrava- 
gant and needless expenditure, and would automatically aid in 
securing a full value assessment. The very fact that the rate 
was closely limited would require a higher standard of assess- 
ment in order to secure the necessary revenue. 

It is obvious, however, that greater expenditures are required 
in new and rapidly developing districts in the northern part of 
the state than in the older sections of the country. A rate which 
would serve as a protection in the latter case would undoubtedly 
hamper the former. To meet this condition the limitation law 
should be made elastic by permitting an increased levy in cases 
of urgent necessity. At the last meeting of the National Tax 
Association a committee previously appointed for the purpose 
made a report which represents the latest expert judgment on the 
subject. The committee recognizes that tax-limit laws have 
proved ineffective in most parts of the country, but believes 
that with proper attention to the necessary details they can be 
made highly serviceable. In order to make a limitation law 
effective, this committee recommends : (i) that the power to 



INCREASE OF PUBLIC EXPENDITURES 69 

levy taxes should be concentrated in the governing board of 
each municipality and taken away from subordinate departments, 
such as school, park, and drainage boards ; (2) that a separate 
limit should be placed upon the rate for each municipal unit, 
with a maximum limit on the total ; (3) that a limit be placed 
on the percentage of increase over the levies of former years, 
and that like limitations be placed on the borrowing power of 
the municipalities to prevent the practice of borrowing money 
for current expenses ; (4) that in case of emergency or urgent 
necessity municipalities be allowed to exceed the limits pre- 
scribed with the approval of an impartial board of authorization, 
showing the necessity to exist. A bill containing the essential 
features of this report was prepared by the tax commission and 
submitted to the legislature oi 191 5, but nothing came of it. 
By failing to give the subject dpnsideration or enact it into law 
it is believed that the legislature neglected its only opportunity 
of regulating high taxes. 

The figures above cited all unite in showing that public 
expenditures have rapidly increased in recent years and that the 
tendency is still upward ; that st^e expenses have increased more 
rapidly in Wisconsin in the last decade than in the average 
state of the Union, but that such excess is largely explained 
by the liberal grants for educational purposes and the construc- 
tion of the state capitol ; that when the state and all its political 
subdivisions are considered as a whole the per capita cost of gov- 
ernment in Wisconsin is less than the average for the entire 
United States or for any adjoining state ; that the increased tax- 
ation required to meet these expenditures cannot be ascribed to 
any single cause or circumstance, but is shared equally by the state 
and all its political subdivisions with schools and cities in the lead. 

While the foregoing figures point to conclusions quite different 
from those usually entertained, they nevertheless indicate rapidly 
increasing public expenditures sufficient to call for careful 
scrutiny and to enlist our earnest efforts to restrict them wher- 
ever that can properly be done. The situation does not, however, 
justify the inference that taxes in Wisconsin are higher or that 
they have increased more rapidly than elsewhere throughout 
the country. On the contrary, the increase in our tax burden is 
only part of a nation-wide movement, and we are far from the 
head of the procession. 



70 SELECTED READINGS IN PUBLIC FINANCE 

13. Methods of controlling the Movement of Public Expendi- 
tures.— A committee appointed by the National Tax Association^ 
has presented the following suggestions concerning such control : 

1. In its first report made at the eighth annual conference 
your committee recommended : 

That this association adopt a resolution urging Congress to direct the 
Census Bureau to publish annually for a selected group of states, counties, 
towns, villages and cities, statistics of expenditure, taxation, pubhc debt 
and wealth, including in this group — similar to the registration area 
used in vital statistics — those states and political subdivisions whose 
financial accounts are pubhshed promptly and in such form as to permit 
of consoHdated statement. 

We are gratified to be able to report that this recommenda- 
tion has been in part anticipated by the plan of the Bureau 
of the Census to publish annually, beginning with 1914, finan- 
cial statistics of the state governments similar to those which 
have been for a number of years published for cities of over 
30,000 population. Study of these census reports, comment by 
the press, use of the figures in colleges and universities, will con- 
tribute, it is believed, to the aw^akening of a keener interest in 
the rapid growth of state and local expenditures. In the opinion 
of your committee, however, similar statistics should be published 
for a representative group of counties, villages, towns and smaller 
cities. To a certain extent accuracy is lost in the attempt to cover 
all political divisions of a given class within the country ; and a 
financial ''registration area" including only those political divi- 
sions whose accounts are published in trustworthy and available 
form would at once signal out those municipalities which are 
included in the area, stimulate other municipalities to improve 
their accounts in order that they might be eligible for inclusion, 
and be of marked service in showing the trend of expenditures 
and receipts in the rural districts of the country. 

2. As contributing materially to the enlightenment of the 
public on financial questions and tendencies, your committee 
desires to commend the work of the newer types of state, county 
and city taxpayers' associations. Some of these associations 
have represented in the past little more than an organized and 

1 Reprinted, with the consent of the Association, from th.e Proceedings of the 
Nhith Annual Conference of the National Tax Association, pp. 463-469. 



INCREASE OF PUBLIC EXPENDITURES 71 

illiberal effort on the part of the participants to reduce their 
own taxes. Such a characterization cannot be applied to the 
higher types of associations which are developing rapidly 
throughout the country and which are devoted not to a blind 
parsimony in public affairs but to the program of financing 
needed extensions out of the savings to be accomplished in those 
departments where waste is prevalent and retrenchment plainly 
possible. The elimination of waste in public business must, it 
is probable, come from without, and organized effort must be 
made by taxpayers and citizens if useless functions and de- 
partments are to be eliminated. A praisew^orthy characteristic 
of the better taxpayers' associations is their constructive work in 
upholding and supporting public officials whose administration 
has been characterized by efficiency and economy. There is no 
proper place in the activity of such organizations for a blind an- 
tagonism to the public official who does his work efffciently. The 
legitimate objection is to unwise, wasteful or ill-timed spending. 

3. Most important of all, perhaps, your committee would em- 
phasize the necessity for a fearless and thorough scrutiny of 
school expenditures. We are in many places making a fetich 
of the school tax, and open-minded examination of school ex- 
penditures is in many jurisdictions halted by political cowardice. 
Officials charged with the duties of investigating and directing 
legislative attention to the distribution and expenditure of school 
funds, who are fully cognizant of errors and abuses in the dis- 
tribution or expenditure of such funds, shrink from raising the 
issue which it is their duty to face. We have reached in many 
jurisdictions something perilously close to a conspiracy of silence 
on this subject. 

Your committee does not believe in niggardliness in educa- 
tional expenditures, and there are doubtless many lines of edu- 
cation and many places in wdiich increased expenditures would 
be socially profitable. But this truth merely furnishes addi- 
tional reasons why unwise methods of distributing school funds 
should be changed, unjustifiable classes of expenditure aban- 
doned, and in all places effective accounting checks placed upon 
the manner and machinery of school disbursements. Your 
committee has no particular educational policy to advocate, none 
to attack. It is patent, however, that abuses are being tolerated 
which would not be sanctioned by the public if courageously 



72 SELECTED READINGS IN PUBLIC FINANCE 

brought to light by public officials who are cognizant of the facts 
and charged with the duty of directing attention to them. The 
school should be dealt with in a spirit of enlightened liberality — 
but also with intellectual and political honesty. 

4. Your committee is convinced also that a grave danger exists 
in many jurisdictions in the manner in which highway improve- 
ments are being financed. Long-time bonds are employed in 
whole or in part to resurface roads and pay for improvements 
which will last only a few years. It is doubtful whether debt 
should be contracted at all for such purposes, but if contracted 
the life of the obligation should not exceed the life of the im- 
provement. To do otherwise is simply to saddle on the future 
the cost of improvements in the use and benefit of which the 
future can have no part. 

With respect to the form of public bonds your committee 
reemphasizes the advantage of serial bonds as compared with 
the wasteful and unscientific sinking-fund obligations and 
methods so frequently employed in i\merican states and cities. 
The serial bond can usually be placed at a lower rate of inter- 
est than a sinking-fund obligation. It is free from most of 
the possibilities of political abuse and manipulation to which 
sinking-funds are exposed. It substitutes a plain and certain 
for an uncertain and complicated liability; and it compels the 
administration which contracted a debt to begin its retirement 
immediately. 

5. In conclusion your committee again directs to your favor- 
able attention the device of limiting by law public expenditures, 
public debts and tax rates. Your committee is aware that tax- 
limit laws have proved ineft'ective in most parts of the country, 
but believes that with proper attention to the necessary details 
they can be made highly serviceable. To make them effective 
the following conditions should in general be fulfilled : 

a. The limitation should preferably be upon the increase 
in the total amount of the levy, although this may profitably be 
accompanied by carefully adapted limitations upon tax rates 
or levies for particular purposes. 

b. The above limitations must be, supplemented by limitations 
upon public debts. Debts may be limited by a percentage upon 
the assessed valuation or better by limitation upon the amount 
of increase which may lawfully be contracted. In all cases there 



INCREASE OF PUBLIC EXPENDITURES 73 

should be an explicit prohibition of bond issues designed to evade 
the limitations imposed upon tax levies. 

c. It is furthermore essential that the limitation should be 
elastic. No blanket law may be applied without injury to all 
the municipalities of a large American commonwealth. The 
emergencies and necessities of particular localities should be met 
by providing administrative means for suspending the law when 
a meritorious case is made out. In general the determination of 
whether an emergency exists should be left to a disinterested and 
impartial board so appointed and selected as to make it certain 
that its members will faithfully carr}^ out the spirit of the law. 
The state tax commission is, perhaps, the natural department in 
which this discretionary authority should be lodged. But there 
is much to be said for the appointment from without of local 
boards empowered to determine whether the exigencies of a 
particular situation are grave enough to warrant departure from 
the letter of the law\ Under such circumstances the Norwegian 
law, we understand, provides that tax levies and expenditures in 
excess of the ordinary limits shall in each subsequent year be 
reduced by at least one-tenth until they have reached the normal 
condition imposed upon the average municipality. This device 
could in all probability be profitably adopted in this country. 

d. As subordinate but nevertheless important provisions, it is 
recommended that the fiscal periods for which appropriations 
and tax levies are made should be defined with particular clear- 
ness in the statute. If this is not done, confusion is likely to arise 
and make questionable the period to which given appropriations 
apply. Where limitations are imposed upon the rate of taxation, 
they should be placed upon each separate authority having power 
to levy taxes and should apply only to those taxes levied under 
that authority ; that is, there should be one limit for county 
taxes, one limit for state taxes, one limit for school taxes (if 
school taxes are levied by a separate body) and one limit for 
town or township taxes. There should be no separate limits 
dealing with distinct funds for purposes of expenditure within 
each municipality. Full discretion should be given to the govern- 
ing body of each municipality to distribute the revenues among 
the purposes of expenditure in the manner which in its judgment 
will prove most profitable. By so doing extravagance resulting 
from special funds and complexity of municipal accounting will 



74 SELECTED READINGS IN PUBLIC FINANCE 

be avoided. In this connection it should be borne in mind that 
limits imposed upon tax rates for state, county and local purposes 
are frequently unfair in operation.- In some states, for instance, 
there is a limit of — say three per cent — on all taxes levied in 
cities whether state, county or local. Under such a law it is 
obvious that the superior jurisdictions (for example, the state and 
county) are in position to compel the city either to violate the 
law or to do without necessary municipal expenditures through 
the mifair encroachment of the superior jurisdictions on the total. 
Each municipality should be responsible only for its own taxes 
and expenditures. 

In some states school boards, park boards and similar bodies 
possess independent powers of taxation. In all such cases there 
should be reserved to the principal governing body the au- 
thority to reduce the estimates of these subordinate bodies, in 
case the total estimates exceed the limits prescribed by law. If 
such power of reduction is not given, the school board or some 
similar body may absorb an undue proportion of the total 
authorized expenditure. 

In states where the town meeting is preserved, the electors them- 
selves frequently levy taxes. The power of levying taxes should, 
it is believed, be vested with the representatives of the people 
rather than the people themselves, and should be exercised at the 
latest moment possible prior to the extension of the tax rolls. 
The town meeting may authorize appropriations ; the town board 
or legislative body should determine the exact tax levy that must 
be made to meet these appropriations. In this way a much better 
balance of revenues and expenditures is possible than can be had 
where the electors themselves vote taxes for future expenditures 
which may or may not prove necessary, and which may or may 
not be financed from sources other than taxation. 

Finally, it is important that the law specifically provide for 
the priority of certain claims where a reduction of estimates is 
necessary to bring a tax levy within statutory limits. Levies 
for the payment of indebtedness, sinking-funds, interest and 
judgments would ordinarily be given such priority. 

e. The following provisions from a bill proposed but not 
passed at the 191 5 session of the Wisconsin Legislature are 
introduced not as models but to suggest some of the details 
which should be kept in mind in framing legislation designed 



INCREASE OF PUBLIC EXPENDITURES 75 

to limit increase in public expenditures. The element of elas- 
ticity in this bill was embodied in a so-called "board of author- 
ization," the functions of which are described in the following 
section of the Wisconsin bill : 

Section 137c. i. The governor, the secretary of state, and a member 
of the tax commission designated by it are created a state board of 
authorization for the purpose of determining whether an emergency or 
urgent necessity exists by reason of which towns, cities (except cities of 
the first class), villages, counties, or school districts may make appro- 
priations and expenditures, levy taxes, and contract debts in excess of 
the hmits prescribed by statute. In case of emergency or urgent necessity 
which in the judgment of the town board, city council, village board, 
county board, or school board requires the appropriation or expenditure 
of money, the le\'y of taxes, or the incurring of debt in excess of the 
limits provided by law, the said authorities may apply to said boards of 
authorization for permission to make such appropriations, levies, or ex- 
penditures and to incur such indebtedness. As soon as may be after 
receiving such applications said board shall hear and determine the 
same in such manner and under such rules as it may prescribe. If said 
board or a majority thereof shall be of opinion that such emergency or 
necessity exists, it may authorize the appropriation or expenditure of 
money, the levying of taxes, or the incurring of debt sufficient to meet 
such emergency. The said limitations shah be construed to apply to the 
appropriations, expenditures, tax levies and indebtedness of towns, cities, 
villages, school districts, and counties made or incurred pursuant to sub- 
division 5 of section 44, sections 425, 430, 430-4, 4766, 495-21, 5530, 
subdivision 4 of section S53P, sections 697a, 697^, 697-38, 697-73, 776, 
777, 819, subdivision 25 of section 893W (892), sections 914, 919c, 9256, 
925-133, 925-i42a, 926-iiw, 926-19, 926-107W, 926-178, 929, 931a, 
937, 959-48, 959-49, 959-78w, 1074, 1240, 1244, 1317^-4, 1317^-5, 
1317W-12, 1317W-13, 1318, 1325/, 1421-9, and 15296, and to all other 
appropriations, expenditures, tax levies, and debts of towns, cities, villages, 
counties and school districts authorized by law. 

. 2. If appHcation for authority to levy additional taxes shall be denied 
or allowed only in part appropriations shall first be made for the pay- 
ment of interest and principal of the indebtedness of such towns, cities, 
villages, counties, or school districts or for sinking-funds for such purpose, 
and for judgments, and thereafter the town board, city council, village 
board, county board or school board shall reduce any or all of the 
appropriations originally requested to bring the totals within the prescribed 
limits. This section shall not apply to cities of the first class. 



CHAPTER IV 

PUBLIC REVENUES: THE VIEWS OF BODIN AND SMITH 

11. Bodin's Classification of Revenues. — In 1576 Jean Bodin, 
in the most extensive survey which had then been made of the 
subject, classified public revenues in the following manner: 

Now there are in general seven ways of raising public 
revenues,^ which include all that can be thought of. The first 
is the landed domain of the commonwealth ; the second, con- 
quests from enemies ; the third, gifts from friends ; the fourth, 
tributes from subject states; the fifth, public traffic or trading; 
the sixth, customs duties upon merchants who bring in or carry 
out merchandize ; and the seventh, taxes upon the citizens.^ 

Of these seven branches of revenue Bodin pronounced the 
first "the most just and certain of all." He contended stoutly 
that " in order that princes might not be obliged to lay taxes 
upon their subjects, or invent methods of seizing upon private 
property, all states and rulers have held it to be an indubitable 
general principle that the public domains should be holy, sacred, 
and inalienable, either by grant or by prescription." Moreover, 
he said, " it is not lawful for princes, even in time of peace, to 
squander the fruits and revenues of the domains ; because they 
are entitled only to the usufruct of the domains, and ought, after 
providing for public needs and their own private expenses, to 
keep the surplus income for times of public necessity." Then, 
too, he believed that domains, when sold, usually brought less 
than their true value ; and that, most important of all, the money 

1 For public revenues Bodin wrote fonds aux finances. 
* Les six livres de la republique, VI, 2. 

76 



PUBLIC REVENUES jy 

derived from such sales is not invested, but " most often dissi- 
pated and given to those who have least deserved it." 

The second, third, and fourth branches of revenue recognized 
by Bodin are not of great importance to the modern student of 
finance. Concerning the fifth, Bodin remarked that, although 
trade was despised by many, "■ it is more seemly for a prince to 
be a merchant than a tyrant, and for a gentleman to traffic than 
to steal." ^ The kings of Portugal, he said, had for a century 
drawn great riches from the East ; while various Italian princes 
had carried on gainful traffic. Yet he observed that when a 
prince traded with his subjects the result was often a royal 
monopoly, by which the subjects were virtually taxed through 
extortionate charges. 

The sixth branch of revenue — duties on imports and exports 
— Bodin pronounced ''one of the oldest and most common 
resources in all states, and thoroughly just, because it is right 
that one who wishes to gain a profit from trade with another 
country than his own should pay duties to the prince." In 
this passage Bodin reflects the common opinion of his age that 
duties upon imports and exports are borne by the merchant, not 
by his customers ; and he justifies them on the ground that it is 
right that a foreigner should contribute to the support of a gov- 
ernment which permits him to come within its jurisdiction and 
trade with its citizens. ^ In fact, he did not regard customs duties 
as a form of taxation, and looked upon them as a kind of revenue 
which could be raised without burden to a prince's subjects.^ 

^ Carafa, on the other hand, had opposed public trading. He said that this was 
undignified for a prince ; that public business would not be so well managed as 
private; that the welfare of the subjects might be sacrificed to the profit of the 
prince. 

2 Throughout Europe our modern customs duties were, by a more or less obscure 
process, evolved from mediaeval tolls and charges which travelers, especially mer- 
chants, were required to pay, nominally for the service of the sovereign in protecting 
them or maintaining roads and bridges. 

^ Yet in one place Bodin says that duties on necessities of life may be so heavy as 
to prove a burden. 



78 SELECTED READINGS IN PUBLIC FINANCE 

Taxes form the last item in Bodin's classification. He con- 
sidered them justified if " all other means are insufficient and 
there is urgent necessity of providing for the state " ; but argued 
that no prince had the right to levy taxes on his subjects without 
their consent, and believed that taxation should be an extraordi- 
nary financial resource. Like his predecessors, he thought that 
in ordinary times the other revenues should suffice for the needs 
of the prince ; and long after his time many writers continued 
to indulge in the illusion that taxation might be reserved for 
unusual emergencies. 

15. Smith's Classification and Discussion. — Modern discus- 
sions of this subject have generally started from Adam Smith's 
chapter on the '' Sources of the General or Public Revenue 
of the Society." Smith said : 

The revenue which must defray, not only the expense of 
defending the society and of supporting the dignity of the chief 
magistrate, but all the other necessary expenses of government, 
for which the constitution of the state has not provided any par- 
ticular revenue, may be drawn, either, first, by some fund which 
peculiarly belongs to the sovereign or commonwealth, and 
which is independent of the revenue of the people ; or, secondly, 
from the revenue of the people. 

* * * * * * * 

The funds or sources of revenue which may peculiarly belong 
to the sovereign or commonwealth consist either in stock ^ or 
in land. 

The sovereign, like any other owner of stock, may derive a 
revenue, from it, either by employing it himself, or by lending 
it. His revenue is in the one case profit, in the other interest. 

The revenue of a Tartar or Arabian chief consists in profit. 
It arises principally from the milk and increase of his own herds 
and flocks, of which he himself superintends the management, 
and is the principal shepherd or herdsman of his own horde or 
tribe. It is, however, in this earliest and rudest state of civil 

1 By " stock " Smith means capital. — ItD. 



PUBLIC REVENUES 79 

government only that profit has been made to form the principal 
part of the public revenue of a monarchical state. 

Small republics have sometimes derived a considerable revenue 
from the profit of mercantile projects. The repubHc of Ham- 
burgh is said to do so from the profits of a public wine cellar and 
apothecary's shop. The state cannot be very great of which the 
sovereign has leisure to carry on the trade of a wine merchant or 
apothecary. The profit of a public bank has been a source of 
revenue to more considerable states. It has been so, not only to 
Hamburgh, but to Venice and Amsterdam. A revenue of this 
kind has even, by some people, been thought not below the 
attention of so great an empire as that of Great Britain. Reck- 
oning the ordinary dividend of the Bank of England at five and 
a half per cent, and its capital at ;£i 0,780,000, the net annual 
profit, after paying the expense of management, must amount, 
it is said, to ;^5 92,900. Government, it is pretended, could 
borrow this capital at three per cent interest, and by taking 
the management of the bank into its own hands, might make 
a clear profit of ;£269,5oo a year. The orderly, vigilant, and 
parsimonious administration of such aristocracies as those of 
Venice and Amsterdam, is extremely proper, it appears from 
experience, for the management of a mercantile project of this 
kind. But whether such a government as that of England 
(which, whatever may be its virtues, has never been famous for 
good economy; which, in time of peace, has generally conducted 
itself with the slothful and negligent profusion that is, perhaps, 
natural to monarchies ; and, in time of war, has constantly 
acted with all the thoughtless extravagance that democracies are 
apt to fall into) could be safely trusted with the management of 
such a project, must, at least, be a good deal more doubtful. 

The post ofifice is properly a mercantile project. The govern- 
ment advances the expense of establishing the different offices 
and of buying or hiring the necessary horses or carriages, and 
is repaid with a large profit, by the duties upon what is carried. 
It is, perhaps, the only mercantile project which has been suc- 
cessfully managed by, I believe, every sort of government. The 
capital to be advanced is not very considerable. There is no 
mystery in the business. The returns are not only certain, but 
immediate. 



8o SELECTED READINGS IN PUBLIC FINANCE 



1 

her 1 



Princes, however, have frequently engaged in many other 
mercantile projects, and have been willing, like private persons, 
to mend their fortunes by becoming adventurers in the common 
branches of trade. They have scarce ever succeeded. The 
profusion with which the affairs of princes are always managed, 
renders it almost impossible that they should. The agents of a 
prince regard the wealth of their master as inexhaustible ; are 
careless at what price they buy ; are careless at what price they 
sell ; are careless at what expense they transport his goods from 
one place to another. Those agents frequently live with the 
profusion of princes, and sometimes, too, in spite of that pro- 
fusion, and by a proper method of making up their accounts, 
acquire the fortunes of princes. It was thus, as we are told by 
Machiavel, that the agents of Lorenzo of Medicis, not a prince 
of mean abilities, carried on his trade. The republic of Florence 
was several times obliged to pay the debt into which their 
extravagance had involved him. He found it convenient, 
accordingly, to give up the business of merchant, the business 
to which his family had originally owed their fortune, and in 
the latter part of his life, to employ both what remained of that 
fortune and the revenue of the state of which he had the dis- 
posal, in projects and expenses more suitable to his station. 

No two characters seem more inconsistent than those of trader 
and sovereign. If the trading spirit of the English East India 
Company renders them very bad sovereigns, the spirit of sover- 
eignty seems to have rendered them equally bad traders. While 
they were traders only, they managed their trade successfully, and 
were able to pay frbm their profits a moderate dividend to the pro- 
prietors of their stock. Since they became sovereigns, with a 
revenue, which, it is said, was originally more than three millions 
sterling, they have been obliged to beg the extraordinary as- 
sistance of government in order to avoid immediate bankruptcy. 
In their former situation, their servants in India considered 
themselves as the clerks of merchants ; in their present situation, 
those servants consider themselves as the ministers of sovereigns. 

A state may sometimes derive some part of its public revenue 
from the interest of money as well as from the profits of stock. 
If it has amassed a treasure, it may lend a part of that treasure, 
either to foreign states or to its own subjects. 



PUBLIC REVENUES 8 1 

The canton of Berne derives a considerable revenue by lend- 
ing a part of its treasure to foreign states ; that is, by placing it 
in the public funds of the different indebted nations of Europe, 
chiefly in those of France and England. The security of this 
revenue must depend, first, upon the security of the funds in 
which it is placed, or upon the good faith of the government 
which has the management of them ; and, secondly, upon the 
certainty or probability of the continuance of peace with the 
debtor nation. In the case of a war, the very first act of hostil- 
ity, on the part of the debtor nation, might be the forfeiture of 
the funds of its creditor. This policy of lending money to for- 
eign states is, so far as I know, peculiar to the canton of Berne. 

The city of Hamburgh has established a sort of public pawn- 
shop, which lends money to the subjects of the state, upon 
pledges, at six per cent interest. The pawn-shop, or Lombard, 
as it is called, affords a revenue, it is pretended, to the state 
of 150,000 crowns, which, at 4s. 6d. the crown, amounts to 
^33750 sterling. 

The government of Pennsylvania, without amassing any 
treasure, invented a method of lending, not money, indeed, but 
what is equivalent to money, to its subjects. By advancing to 
private people, at interest, and upon land security, to double 
the value, paper bills of credit, to be redeemed fifteen years 
after their date, and, in the meantime, transferable from hand 
to hand like bank notes, and declared by act of assembly to be 
a legal tender in all payments from one inhabitant of the prov- 
ince to another, it raised a moderate revenue, which went a 
considerable way toward defraying an annual expense of about 
;£4,500, the whole ordinary expense of that frugal and orderly 
government. The success of an expedient of this kind must 
have depended upon three different circumstances : first, upon 
the demand for some other instrument of commerce, besides 
gp]d and silver money ; or, upon the demand for such a quan- 
tity of consumable stock, as could not be had without sending 
abroad the greater part of their gold and silver money, in order 
to purchase it ; secondly, upon the good credit of the govern- 
ment which made use of this expedient; and, thirdly, upon the 
moderation with which it was used, the whole value of the 
paper bills of credit never exceeding that of the gold and silver 



82 SELECTED READINGS IN PUBLIC FINANCE 

money which would have been necessary for carrying on their 
circulation, had there been no paper bills of credit. The same 
expedient was upon different occasions adopted by several other 
American colonies ; but, from want of this moderation, it pro- 
duced, in the greater part of them, much more disorder than 
conveniency. 

The unstable and perishable nature of stock and credit 
renders them unfit to be trusted to as the principal funds of 
that sure, steady, and permanent revenue, which can alone give 
security and dignity to government. The government of no 
great nation that was advanced beyond the shepherd state 
seems ever to have derived the greater part of its public rev- 
enue from such sources. 

Land is a fund of a more stable and permanent nature ; and 
the rent of public lands, accordingly, has been the principal 
source of the public revenue of many a great nation that was 
much advanced beyond the shepherd state. From the produce 
or rent of the public lands, the ancient republics of Greece and 
Italy derived for a long time the greater part of that revenue 
which defrayed the necessary expenses of the commonwealth. 
The rent of the crown lands constituted, for a long time, the 
greater part of the revenue of the ancient sovereigns of Euro- 
pean states.^ 

War, and the preparation for war, are the two circumstances 
which in modern times occasion the greater part of the neces- 
sary expense of all great states. But in the republics of Greece 
and Italy, every citizen was a soldier, who both served and pre- 
pared himself for service at his own expense. Neither of these 
two circumstances could occasion any very considerable expense 

1 Cohn remarks that the " German princes of the sixteenth, seventeenth, and even 
the eighteenth centuries regarded themselves as great landowners and landlords ; " 
so that, in fact, " the administration of domains and forests wsls or was becoming 
the central point of their financial policy." In Prussia, as late as 1740, the prevail- 
ing opinion was " that the greatest conceivable stretch of taxation would not alone 
suffice to support the state and the army ; " so that it was believed necessary to 
enlarge the domains and derive the largest possible revenue from them. In the 
southwestern states of Germany, also, the governments managed, even until the end 
of the eighteenth century, to get along without regular taxation in times of peace. 
Cohn, Finanzwissenschaft, § 59. In France and England the kings followed a less 
thrifty policy, and after the sixteenth and seventeenth renturies revenues frorp 
domains were of little importance, — Ed, 



PUBLIC REVENUES 83 

to the state. The rent of a very moderate landed estate might 
be fully sufficient for defraying all the other necessary expenses 
of government. 

In the ancient monarchies of Europe, the manners and cus- 
toms of the times sufficiently prepared the great body of the 
people for war ; and when they took the field, they were, by the 
condition of their feudal tenures, to be maintained either at 
their own expense, or at that of their immediate lords, without 
bringing any new charge upon the sovereign. The other ex- 
penses of government were, the greater part of them, very mod- 
erate. The administration of justice, it has been shown, instead 
of being a cause of expense, was a source of revenue. The 
labor of the country people, for three days before and for three 
days after harvest, was thought a fund sufficient for making 
and maintaining all the bridges, highways, and other public 
works, which the commerce of the country was supposed to 
require. In those days, the principal expense of the sovereign 
seems to have consisted in the maintenance of his own family 
and household. The officers of his household, accordingly, 
were then the great officers of state. The lord treasurer re- 
ceived his rents. The lord steward and lord chamberlain 
looked after the expenses of his family. The care of his stables 
was committed to the lord constable and the lord marshal. His 
houses were all built in the form of castles, and seem to have 
been the principal fortresses which he possessed. The keepers 
of those houses or castles might be considered as a sort of mili- 
tary governors. They seem to have been the only military 
officers whom it was necessary to maintain in time of peace. 
In those circumstances the rent of a great landed estate might, 
upon ordinary occasions, very well defray all the necessary 
expenses of government. 

In the present state of the greater part of the civilized mon- 
archies of Europe, the rent of all the lands in the country, 
managed as they probably would be if they all belonged to one 
proprietor, would scarce, perhaps, amount to the ordinary rev- 
enue which they levy upon the people even in peaceable times. 
The ordinary revenue of Great Britain, for example, including 
not only what is necessary for defraying the current expense 
of the year, but for paying the interest of the public debts, and 



84 SELECTED READINGS IN PUBLIC FINANCE 

for sinking a part of the capital of those debts, amounts to up- 
ward of ten millions a year. But the land tax, at four shillings 
in the pound, falls short of two millions a year. This land tax, 
as it is called, however, is supposed to be one fifth, not only of 
the rent of all the land, but of that of all the houses, and of the 
interest of all the capital stock of Great Britain, that part of it 
only excepted which is either lent to the public, or employed as 
farming stock in the cultivation of land. A very considerable 
part of the produce of this tax arises from the rent of houses 
and interest of capital stock. The land tax of the city of Lon- 
don, for example, at four shillings in the pound, amounts to 
;£i 23,399, 6j- 7^' That of the city of Westminster, to ^63,092, 
\s, ^d. That of the palaces of Whitehall and St James's, to 
;£30,754, 6s, 3<^. A certain proportion of the land tax is in the 
same, manner assessed upon all the other cities and towns cor- 
porate in the kingdom, and arises almost altogether, either from 
the rent of houses, or from what is supposed to be the interest 
of trading and capital stock. According to the estimation, there- 
fore, by which Great Britain is rated to the land tax, the whole 
mass of revenue arising from the rent of all the lands, from that 
of all the houses, and from the interest of all the capital stock, 
that part of it only excepted which is either lent to the public 
or employed in the cultivation of land, does not exceed ten 
millions sterling a year, the ordinary revenue which government 
levies upon the people even in peaceable times. The estima- 
tion by which Great Britain is rated to the land tax is, no doubt, 
taking the whole kingdom at an average, very much below the 
real value ; though in several particular counties and districts 
it is said to be nearly equal to that value. The rent of the lands 
alone, exclusive of that of houses and of the interest of stock, 
has by many people been estimated at twenty millions, an esti- 
mation made in a great measure at random, and which, I appre- 
hend, is as likely to be above as below the truth. But if the 
lands of Great Britain, in the present state of their cultivation, 
do not afford a rent of more than twenty millions a year, they 
could not well afford the half, most probably not the fourth part 
of that rent, if they all belonged to a single proprietor, and were 
put under the negligent, expensive, and oppressive management 
of his factors and agents. The crown lands of Great Britain 



PUBLIC REVENUES 85 

do not at present afford the fourth part of the rent which could 
probably be drawn from them if they were the property of 
private persons. If the crown lands were more extensive, it is 
probable they would be still worse managed. 

The revenue which the great body of the people derives from 
land is in proportion, not to the rent, but to the produce of the 
land. The whole annual produce of the land of every country, 
if we except what is reserved for seed, is either annually con- 
sumed by the great body of the people, or exchanged for some- 
thing else that is consumed by them. Whatever keeps down 
the produce of the land below what it would otherwise rise to, 
keeps down the revenue of the great body of the people still 
more than it does that of the proprietors of land. The rent of 
land, that portion of the produce which belongs to the pro- 
prietors, is scarce anywhere in Great Britain supposed to be 
more than a third part of the whole produce. If the land, which 
in one state of cultivation affords a rent of ten millions sterUng 
a year, would in another afford a rent of twenty millions (the 
rent being, in both cases, supposed a third part of the produce), 
the revenue of the proprietors would be less than it otherwise 
might be by ten millions a year only ; but the revenue of the 
great body of the people would be less than it otherwise might 
be by thirty millions a year, deducting only what would be neces- 
sary for seed. The population of the country would be less by 
the number of people which thirty millions a year, deducting 
always the seed, could maintain, according to the particular 
mode of living and expense which might take place in the dif- 
ferent ranks of men among whom the remainder was distributed. 

Though there is not at present, in Europe, any civilized state 
of any kind which derives the greater part of its public revenue 
from the rent of the lands which are the property of the state ; 
yet, in all the great monarchies of Europe, there are still many 
large tracts of land which belong to the crown. They are gen- 
erally forest ; and sometimes forest where, after traveling sev- 
eral miles, you will scarce find a single tree ; a mere waste and 
loss of country in respect both of produce and population. In 
every great monarchy of Europe the sale of the crown lands 
would produce a very large sum of money, which, if applied to 
the payment of the public debts, would deliver from mortgage 



86 SELECTED READINGS IN PUBLIC FINANCE 

a much greater revenue than any which those lands have ever 
afforded to the crown. In countries where lands, improved and 
cultivated very highly, and yielding at the time of sale as great 
a rent as can easily be got from them, commonly sell at thirty 
years' purchase, the unimproved, uncultivated, and low-rented 
crown lands, might well be expected to sell at forty, fifty, or 
sixty years' purchase. The crown might immediately enjoy the 
revenue which this great price would redeem from mortgage. 
In the course of a few years it would probably enjoy another 
revenue. When the crown lands had become private property, 
they would, in the course of a few years, become well-improved 
and well-cultivated. The increase of their produce would in- 
crease the population of the country, by augmenting the revenue 
and consumption of the people. But the revenue which the 
crown derives from the duties of the customs and excise, would 
necessarily increase with the revenue and consumption of the 
people. 

The revenue which, in any civilized monarchy, the crown 
derives from the crown lands, though it appears to cost nothing 
to individuals, in reality costs more to the society than perhaps 
any other equal revenue which the crown enjoys. It would, in 
all cases, be for the interest of the society to replace this revenue 
to the crown by some other equal revenue, and to divide the 
lands among the people, which could not well be done better, 
perhaps, than by exposing them to public sale. 

Lands, for the purpose of pleasure and magnificence, parks, 
gardens, public walks, etc., possessions which are everywhere 
considered as causes of expense, not as sources of revenue, seem 
to be the only lands which, in a great and civilized monarchy, 
ought to belong to the crown. 

Public stock and public lands, therefore, the two sources of 
revenue which may peculiarly belong to the sovereign or com- 
monwealth, being both improper and insufficient funds for 
defraying the necessary expense of any great and civilized state, 
it remains that this expense must, the greater part of it, be 
defrayed by taxes of one kind or another; the people con- 
tributing a part of their own private revenue in order to make 
up a public revenue to the sovereign or commonwealth. ^ 

1 Smith's discussion of taxation will be considered in a later chapter. — Fd. 



CHAPTER V 

REVENUES FROM DOMAINS 

16. Later Views concerning Domains : Rau. — In England and 
France, where revenues from landed domains had already sunk 
to small proportions, the opinions of Adam Smith concerning 
pubHc landholding gained instant acceptance, and have ever 
since dominated financial thought. In Germany, Smith's views 
were accepted by many writers during the first half of the nine- 
teenth century, but after that German opinion gradually drifted 
back toward the older position, and became more favorable to 
the retention of domains. About the middle of the nineteenth 
century a leading economist, Karl Heinrich Rau, presented the 
following summary,^ which has become classical in German 
science, of the reasons for and against the alienation of 
domains ; 

At the present day the following are the principal reasons 
in favor of the alienation of domains : 

1. A government is not well fitted to carry on an industry. 
Private owners, as a rule, make better use of a source of income 
because they work with greater zeal, give more thought to the 
improvement of processes, and can manage any branch of 
industry with vigor, a thing especially important in intensive 
agriculture. Governments, on the other hand, must maintain an 
expensive body of lower and higher officials who are less ener- 
getic and economical than a proprietor, or are fettered by 
troublesome administrative regulations. Experience shows 
conclusively that domains in private hands yield a larger 
net income. . . . 

2. The sale of domains is an easy method of paying off public 

1 From Rau's Finanzwissenschaft, §§ 94-98 (fifth edition, 1864). 
87 



88 SELECTED READINGS IN PUBLIC FINANCE 

debts, if it is considered important to do this on a large scale; 
while the treasury profits thereby because tTie purchase price of 
land is usually so large that the interest on the debt retired 
exceeds the former income from the domains.^ 

3. The possession of domains gives the government special 
interests of its own which make it disinclined to undertake many 
reforms of general benefit to society, such as the abolition of 
feudal burdens on landed property; or it may at least be 
unpopular on account of the conflict which arises with the 
interests of private citizens. 

4. Experience shows that domains are in no way necessary to 
insure a revenue sufficient to meet pufbiic expefiditure,~anan;hat 
nrseveral states of western Europe in which the domains yield 
only a small amount, adequate revenue fl.ows regularly into the 
treasury without pressing too heavily upon the citizens. 

Upon the other hand, the retention of domains, even at the 
present day, may be defended upon other grounds : 

1. From the standpoint of general statecraft, domains have 
been considered an important support of hereditary monarchy, 
which has sprung from the possession of large landed wealth 
and must always rest upon it. Income from- dt)mains is f)rized 
also because it does not depend upon the consent or grant of a 
parhamentary body, and can be relied upon in times of internal 
disturbance or social changes. . . . 

2. The income from domains arouses ao. dissatisfaction or 
feeling of deprivation, because it flows from a business under- 
taking independently carried on by the government by means 
of public property which has long been withdrawn from private 
ownership. Upon the other hand, taxes have to be paid year 
after year from the incomes of private citizens, and unavoidably 
lead to many inequalities and much vexation. If the domains 
should be sold to poor advantage or the purchase money unwisely 
used, it would then be necessary even to increase the taxes in 
order to make good the loss of the income from the domains. 

^ If, for instance, domains which yield a net income of 1,000,000 florins can be 
sold for 30,000,000 florins, and this sum can be used in retiring debts which bear 
4^ per cent interest, the government in this way saves 1,350,000 florins in interest 
payments, which exceeds by 350,000 florins the income formerly drawn from 
domains. 



REVENUES FROM DOMAINS 89 

But with this argument it is necessary to observe, that the alleged 
advantage of income from domains would not be decisive if the 
public lands were less productive than private estates so that the 
production of wealth would be smaller. Only when the domains 
are as well managed as private estates is this argument impor- 
tant. Then in the next place, if the money received in the sale 
of domains is applied to the extinction of debts or profitably 
invested, no increase of taxation would be necessary ; while if 
other causes increase public expenditures, the retention of do- 
mains could not prevent heavier taxation. In a well-governed 
state legal precautions would be taken against squandering the 
money received from the sale of domains, or spending it for 
current outlays. 

3. Even if experience shows that public lands in many cases 
yield a smaller income than private estates, it cannot be affirmed 
that this must invariably be the case. In this matter one must 
take into account the kind of land in question, and its quality ; 
while it must be remembered that the methods of administering 
it may be improved. . . . 

4. Thje income from domains must increase in the course of 
time, because the rent of land rises as the prices of its products 
advance and the soil is better and more scientifically cultivated. 
(Rau goes on to show that this consideration is offset by the fact 
that the income from the lands is larger under private manage- 
ment, and that the public treasury will profit, therefore, because 
the citizens are richer.) 

5. Public loans can be more easily floated because the do- 
mains afford coilateral security acceptable to creditors. This, 
however, is of little moment, especially in the larger countries 
with good credit, where well-managed finances and the proven 
good faith of the government make landed possessions unnec- 
essary as a support for pubHc credit. The concurrence of a 
parliament in contracting a loan is of greater aid to the public 
credit than the pledging of domains, a security which is some- 
times of doubtful legal force. 

6. Dojnains may be useful because improved methods of cul- 
tivation can be introduced upon them, and then the knowledge 
of such things can be widely extended. .00 



90 SELECTED READINGS IN PUBLIC FINANCE 

Later German writers generally attach less weight than Rau 
did to the arguments in favor of alienation. Wagner, for 
instance, says that Rau erred in giving attention exclusively to 
the financial aspects of the question, or to the influence of pub- 
lic landownership on the production of wealth, and says that 
the problem of .the distribution of wealth and various ques- 
tions of social policy should be taken into account. The reten- 
tion of domains, he thinks, may be defended on such grounds 
even when the considerations mentioned by Rau seem to tell 
against it.^ Into this subject we cannot follow him, since the 
questions involved are not of a financial character and fall out- 
side of the scope of our studies. 

17. The Public Domain of the United States. — By cession from 
the original states and by subsequent acquisitions of new terri- 
tory (as in 1803, 1819, 1845, 1846^ 1^53^ and 1867), the United 
States has, at various times, come into the proprietorship of a 
public domain of not less than 2,708,388 square miles. The 
general pohcy of the government has been to dispose of the land 
as fast as seemed practicable and desirable. The methods 
followed and results achieved are described in the following 
article by Professor Albert Bushnell Hart:^ 

First in amount and importance are the sales. The history 
of the public lands happens to fall into five tolerably distinct 
periods, each of about twenty years. From 1784 to 1801, the 
policy of the government was to sell lands in large quantities 
by special contract ; the result was an average sale of less than 
one hundred thousand acres yearly. In 1800 was inaugurated 
a new system of sales, in small lots, on credit ; about eighteen 
miUions of acres were thus taken, but more than two and a half 
millions subsequently reverted to the government under relief 
acts. In the middle of 1820 began a system of sales for cash, 

1 Finanzwissenschaft, I, §§ 219-220. 

2 Reprinted, by permission of author and publisher, from Hart's Practical Essays 
on American Government, pp. 239 et seq. New York, Longmans, Green, and Co. 
(1893). 



REVENUES FROM DOMAINS 91 

in lots to suit purchasers. Seventy-six million acres were sold 
in twenty years ; but of this large quantity one half passed out 
of the hands of the government in the two years preceding the 
panic of 1837. After that revulsion, the preemption system 
was adopted, by which the most desirable lands were reserved 
for actual settlers, at a low price. Except in the years 1856- 
57, the sales were steady, and kept pace with the growth of 
the West. The homestead system carried the principle of " land 
for the landless" still further, and cut down cash sales to an 
average of a million acres a year. Since 1880, preemptions 
have been resorted to again, in many cases for fraudulent pur- 
poses ; and the total sales average almost four million acres a 
year. At present, lands are classified by the land office as 
agricultural, saline, town site, mineral, coal, stone, and timber, 
and desert lands. From 1854 to 1862, there was a further class 
of "graduated lands." These were tracts which had long 
remained unsold, and were offered to abutters at very low prices. 
The mimimum price for ordinary lands has for many years 
been $1.25 per acre. Timber lands and lands reserved from 
railroad land grants are sold at the "double minimum " of i^2.50 
per acre; mineral lands are valued at ^2.50 and ^5.00 an acre; 
coal lands, at ^10 and $20 an acre. 

It would seem, therefore, as though the sale of a hundred 
and ninety-two million acres must have brought in a handsome 
sum to the government. As long ago as 1787, Thomas Jeffer- 
son wrote : " I am very much pleased that our Western lands 
sell so successfully. I turn to this precious resource as that 
which will, in every event, liberate us from our domestic debt, 
and perhaps, too, from our foreign one." It is true that the 
proceeds of the public lands did eventually wipe out the last 
vestiges of the debt which had existed in 1787. It is true 
that the lands had, up to June 30, 1883, brought into the Treas- 
ury of the United States the smart amount of $233,000,000. 
It is equally true that, except for the period from 1830 to 
1840, the lands have been a drain upon our finances. 
At the end of the financial year 1882-83, the government 
was out of pocket, so far as cash outlay and receipts are 
measures of the value of the lands, in the sum of more than 
one hundred and twenty-six millions of dollars. 



92 SELECTED READINGS IN PUBLIC FINANCE 

The first great item of expense is the extinguishment of the 
Indian claim to ownership. Since 1781, the United States gov- 
ernment has recognized the right of occupancy, but has asserted 
its sole prerogative to acquire Indian lands. First and last, up 
to the end of the fiscal year 1882-83, it had paid two hundred 
and nine millions of dollars for the interest of the Indian in his 
lands. ... A second source of expense has been the purchase 
money paid for all the annexations since 1802, except that of 
Oregon. The items in the category taken together make an 
outlay of upward of eighty-eight millions. Surveys and expenses 
of disposition add fifty-five millions. If a strict account were to 
be made up, there should be added to the expenditure a propor- 
tion of the general expenses of maintaining the government 
and the whole cost of the Mexican war. 

Unsatisfactory as is the financial result of our public-land 
policy, we must reflect that the sales account for but little more 
than a fourth part of the total disposition. Perhaps we shall 
find the remainder so used as to give some indirect benefit 
which cannot be reckoned in dollars and cents. . . . (After 
describing early grants to soldiers and others, the author passes 
on to consider the homestead grants. — Ed.) 

The homestead act of 1862 introduced a new principle into 
the public-land system ; it provided not only for the reservation 
of farms for actual settlers, but it proposed to give land to all 
heads of families, citizens of the United States or intending to 
become such. The effect of the act has been threefold. Under 
its provisions and those of the similar timber-culture act of 1873, 
immigration has been stimulated, the revenue from the lands was 
for many years almost cut off, and one hundred and fifty millions 
of acres have passed from the public domain into private hands. 
In some respects, the rapid settlement of the West, which has been 
greatly favored by the generous policy of the government, has 
undoubtedly conduced to the welfare of the country, and has 
made possible our elaborate systems of transportation and dis- 
tribution on a large scale. It is, nevertheless, a question whether 
the present generation, as well as posterity, might not have been 
equally prosperous, if the government had made the conditions 
of acquirement more rigorous. 

To ascribe the depletion of our reserves of land to the bounty 



REVENUES FROM DOMAINS 93 

and homestead acts is unjust ; the United States has given to 
the states almost as much as to individuals. Most of the original 
sixteen states (including Vermont, Kentucky, and Tennessee) 
were in possession of unoccupied lands in 1802. The new- 
states as they have been admitted have received large gifts of 
three kinds. To most of them have been granted from one to 
six townships of saline lands, an aggregate of half a million acres. 
For all admitted to the Union previous to 1850 have been re- 
served one thirty-sixth of the public domain within their limits, 
for school purposes. The fortunate states which have come in 
since 1850 receive one eighteenth, and a like amount is reserved 
in each of the territories, except the Indian Territory and 
Alaska. The total thus set aside is about sixty-eight million 
acres. For each of the new states and territories has also 
been reserved a tract of from two to four townships for a uni- 
versity — a total of more than a million acres. In 1862, Con- 
gress granted to each state in the Union lands proportioned 
to its representation in Congress for an agricultural college. 
Nearly ten million acres were thus appropriated. It is at least 
doubtful whether a system of endowed public schools is desir- 
able. Many of the states have squandered, lost, or misused the 
lands acquired for educational purposes. In others the people 
decline to tax themselves for school purposes, and rely wholly 
on the fund. But it is even worse with other forms of grants 
to states. In 1841, a time of reckless disposition of the lands, 
a grant of five hundred thousand acres was made to each of 
seventeen of the states, for internal improvements. The larg- 
est single gift made to the states up to that time was included 
in the swampland grants of 1849 ^^^ subsequent years. All 
the " swamp and overflowed lands " within the limits of any state 
were granted to that state. It was expected that the sale of a 
part would pay the expense of reclaiming the whole. It does 
not appear that any great improvements have been made by 
the states; and the United States is now spending large sums 
in building levees to protect regions thus presented to the 
states in 1850. When the six new states were admitted into 
the Union in 1890 and 1891, they received the most magnifi- 
cent endowment ever bestowed on republican commonwealths. 
Part of the area was reserved school lands ; part of it was in 



94 SELECTED READINGS IN PUBLIC FINANCE 

the form of new gifts for public buildings, universities, and other 
purposes ; the whole amounted to twenty-three million acres, 
and the gift was accompanied by a promise that no part should 
be sold at less than ^lo an acre. 

Throughout the history of the country there has prevailed 
the double error that a gift of land cost the government noth- 
ing, yet was of very great value to the recipient. Upon the 
land that is of any worth, the United States has spent money 
for surveys and administration ; yet the states and other grantees 
have found it hard to turn the gifts into money. A great part 
of the educational grants have realized not more than a dollar 
an acre. It would in many respects be preferable for the gov- 
ernment to appropriate the proceeds of the lands rather than to 
give the disposal of the soil to the states. A distribution act 
was passed in 1 841, by which the net amount received for pub- 
lic lands was to be paid to the states ; but it was repealed so 
speedily that only about ^700,000 was thus distributed. A much 
larger sum has accumulated, and has been paid to the states, 
under the "two, three, and five per cent funds." By agreement 
with each state as it has entered the Union, the United States 
consents to pay over a proportion of the net proceeds of the 
lands within that state. More than ^7,000,000 have been al- 
lowed under this provision. The deduction is. not strictly a 
gift, since the states in return bind themselves not to tax 
public land until it has been five years in the hands of a private 
owner. 

In theory, the lands appropriated for internal improvements 
of various kinds have also been sacrificed in order to make the 
remainder more valuable. The Ohio five per cent fund in 1802 
was intended to be applied to the construction of the Cuniber- 
land road, which was to be the great avenue for purchasers and 
settlers from the Atlantic coast. This was the beginning of the 
system of internal improvement at the expense of the nation ; 
but, in practice. Congress built the road out of general funds. 
It was not until 1827, four years after the first river and harbor 
bill, that direct grants of lands were made in aid of internal im- 
provements. The new and momentous policy began with grants 
for canals. Between 1827 and 1850 about three miUion acres 
had been appropriated to this purpose, principally to secure the 



REVENUES FROM DOMAINS 95 

completion of the system connecting the lakes with the Ohio 
and Mississippi. The jealousy caused by the action of Congress 
brought about the comprehensive grant of iive hundred thou- 
sand acres to each "public land state," to which reference has 
already been made. But the most familiar form of grants for 
internal improvements dates from 1850. By that year the rail- 
road system had been extended so far west as to penetrate large 
tracts of unsold lands. Congress aided the extension of the 
system by assigning to the states of Illinois, Alabama, and 
Mississippi nearly four million acres, to be used toward the 
construction of the Illinois Central and Mobile and Ohio lines, 
reaching from Chicago to the Gulf. Between 1850 and 1872 
about eighty similar landgrants were made. The principal 
lines of communication in Minnesota and Iowa, and important 
roads in Wisconsin, Illinois, Missouri, Arkansas, Louisiana, 
Alabama, Mississippi, and Florida, were subsidized. In 1862 a 
new problem presented itself. It became a political necessity 
to lay a line of railroad across the continent. Between Iowa 
and CaUfornia there were no states to which the grant could 
pass. Congress, therefore, promised a subsidy of land to cor- 
porations which undertook to build the Pacific railroads. 

In the ten years following, some twenty-three similar grants 
were made, in almost all cases for roads running east and west, 
and intended to form links in transcontinental lines. To satisfy 
the terms of the acts, about one hundred and fifty-five millions 
of acres would be necessary. Several companies never built 
their roads, and earned no grant; others completed the work 
after the prescribed time. In a few cases Congress has formally 
declared the grant void, and has restored the land to the public 
domain. A few grants for canals and for wagon roads, between 
the years 1863 and 1872, make up the three remaining millions 
of the grand total promised by the government — a total of a 
hundred and sixty-two miUions of acres. Out of this amount 
only about fifty millions of acres had been patented to the states 
and companies in 1883. During the ten years following, there 
have been legal reversions to the government of fifty million 
acres out of unpatented landgrants ; and large tracts are still 
disputed. 



96 SELECTED READINGS IN PUBLIC FINANCE 

Yet so vast is the area of the country that the government 
might repeat its sales and gratuities, acre for acre, without 
exhausting its reserves of land in the West alone. In spite of 
the fact that the states had in the beginning, or have retained, 
five hundred million acres, and that the United States has parted 
with seven hundred and thirty million acres, the public domain 
still comprises nearly a thousand million acres.^ The real sig- 
nificance of the present alarm about the disappearance of the 
public lands, lies in the fact that the greater part of the unsold 
lands are either reserved for the Indians or are unfit for ordinary 
tillage. Upon the best vacant lands — amounting to about a 
hundred millions of acres — the Indians are still seated. The 
area can be reduced by judicious and costly treaties ; but it 
amounts only to about three hundred acres per head ; and, if 
the occupants should take up land in severalty to the amount 
of 320 acres for each head of a family, they would still retain 
thirty million acres of valuable lands ; they could not be dispos- 
sessed without such injustice as would rouse the nation. Experts 
in the land office assure us that, making all deductions and all 
allowances, the remaining lands are worth upward of a thousand 
millions of dollars. There is no evidence in the past policy of 
the government for believing that we shall actually net one tenth 
of that amount. The greater part of the region is officially 
classified as "Desert Lands," and is for sale in tracts of 
640 acres, at ;^i.2 5 an acre. Nothing but the temporary 
increase of preemption has enabled the land office at present 
to pay its running expenses out of its income. The golden 
time is past ; our agricultural land is gone ; our timber lands 
are fast going ; our coal and mineral lands will be snapped up as 
fast as they prove valuable. There is no great national reserve 
left in the public lands unless there should be a change of 
policy. Should disaster overtake us, we must depend, like other 
nations, on the wealth of the people, and not on that of the 
government. 

It iS) of course, true that the lands are still in existence, and 
have been made many times more valuable by the labor of the 

1 On July I, 1904, the unappropriated and unreserved public lands amounted to 
841,872,000 acres, and the reserved lands to 172,873,000 acres. The lands sold ot 
given away aggregated 794,790,000 acres. — Ed. 



( 



REVENUES FROM DOMAINS 97 

occupants. It is further true that large quantities of vacant 
land are for sale by the railroads and other grantees. There is 
no immediate danger of a land famine. There is abundant 
cause for criticism of the system adopted by the United States, 
but it should rightfully be directed rather against the manner in 
which the laws have worked than against their purpose. Since 
1 84 1 the lands have nominally been reserved for actual settlers; 
but practice has shown grave defects in the settlement laws — 
defects which Congress has no will to remedy. No man can 
legally preempt land or take up a homestead more than once ; 
but this limitation is very difficult to guard, and perjury and 
fraud are alarmingly frequent. No one man can legally acquire 
more than 1120 acres of land from the government, if any one 
else wants the land; 160 acres as a preemption, as much more 
as a homestead, another quarter section as a tree claim, and a 
section of 640 acres as a desert-land claim. Actually, single 
individuals and companies own large estates, which a few years 
ago were in the hands of the government. 

The accumulation of the large tracts is often brought about 
by fraud, but much oftener through the mistaken generosity of 
the government or through defective land laws. It is not 
always necessary to hire men fraudulently to take up land for 
the company. In Texas, the state has sold its lands in its own 
way, often in large blocks. The school lands and the scrip for 
bounty warrants have legally been used for locating wide 
extending estates. The railroad lands, although not in compact 
tracts, can be used as a nucleus for a large accumulation ; and, in 
a country where land is cheap and money dear, the patient, 
long-headed capitalist can buy up valuable claims in a legitimate 
manner. The chief source of the present trouble in the West 
lies in the fact that the government never recognized that graz- 
ing land must be sold and occupied under different conditions 
from ordinary arable lands. The first comers have been allowed 
to take up the water fronts. Any comprehensive system of 
irrigation of large areas for the benefit of future land seekers 
has thus been forever prevented. The possessor of the rivers 
and water-holes has gained control of the country behind his 
claim. In such a contest, the largest and richest concerns have 
a great advantage. There was a time when the government 



98 SELECTED READINGS IN PUBLIC FINANCE 

might have laid out, for sale or lease, large tracts of grazing 
lands, each with a sufficient water front. It is now too late. 

The fundamental criticism upon our public-land policy is, not 
that we have sold our lands cheap, not that we have freely given 
them away, but that the gifts have in too many cases inured to 
the benefit of those whom the government meant to ignore. 
The " land grabber " is, in most cases, simply taking advantage 
of the chances which a defective system has cast in the way of 
shrewd and forehanded or unscrupulous men. The difficulty is 
certainly not in the land office, which, in the midst of perplex- 
ing complications, has striven hard to protect our lands. The 
fault lies at the door of the Congress of the United States, which 
has the power, but not the will, to correct notorious defects 
in our system. Still farther back, the fault is with the free 
citizens of the Republic, who have been too much occupied to 
insist that there should be a comprehensive land policy, pro- 
viding for the equitable disposition of all classes of the public 
lands. 

18. The Case of Forests. — -It is now generally admitted that 
public ownership of forests stands upon a very different footing 
from public ownership of agricultural land. Leroy-Beaulieu, 
for instance, who supports strongly the view that public owner- 
ship of agricultural domains is unwise, holds that the case is 
otherwise with forests. He says : ^ 

Up to this point we have studied only the agricultural 
domain of the state, but the greater part of the land owned by 
states consists of forests. These differ very greatly from agri- 
cultural holdings. They are much better adapted for state 
management because they have to be administered on a large 
scale, methodically, and by scientific rules. The ability of the 
state to manage forests is better established than its ability to 
administer agricultural properties. In the former case the state 
seems to have the natural mission to preserve this form of 
wealth, which is so necessary to the country and so likely to 
be destroyed by private individuals. The state, since it is in 

1 Traite de la science des finances, Pt. I, Bk. i, ch. 4. Reproduced by per. 
mission of the author. 



REVENUES FROM DOMAINS 99 

modern societies the only immutable thing, the only agent to 
represent posterity and to guard the interests of coming gener- 
ations, does not depart from its legislative functions when it 
preserves forest property the maintenance of which is con- 
sidered advantageous to the prosperity of the country. 

At this point we should not take the purely financial, what 
the Germans call the " cameral," point of view. Although forests 
may be a source of revenue to a state, and, as we shall show, a 
source of increasing revenue, this is merely an incidental con- 
sideration ; it would not be enough to justify state ownership of 
forests. And it is no longer necessary to consider the question 
from the administrative point of view, with reference to the 
needs of the public service. Formerly one of the reasons 
assigned for state forest preservation was that the navy needed 
the most perfect ship timber, which could with difficulty be 
found in private forests. But now that ships are built chiefly 
of iron and steel, this argument has lost its force. In truth it 
never had much weight, since a state could always purchase 
abroad, by offering a suitable price, the ship timber which it 
needed. And, finally, the subject should not be studied from 
what may be called the " democratic " point of view. Sometimes 
state preservation of forests has been urged in the interests of 
the consumers, especially of the lower classes, to whom wood is 
an article of prime necessity, the price of which ought not to be 
too high. But the state is no more bound to insure to con- 
sumers a reasonable price for wood than for grain ; and, besides, 
it could be argued that while the state reduced the price of wood 
by preserving a large forest area, it was raising the prices of 
grain and meat by reducing the area devoted to producing these 
commodities. 

The true point of view is that of the influence of the forests 
upon the climate, the flow of rivers, and the general conditions 
of production. If it is demonstrated that the complete dis- 
appearance or the serious diminution of the forests results in 
more frequent drouths and turns rivers into devastating tor- 
rents, it is evident that the important interest of the regulation 
of the water supply justifies state ownership of forests. The 
disappearance of these forest reserves, which regulate naturally 
the flow of the rivers, would injure the surrounding country, 



loo SELECTED READINGS IN PUBLIC FINANCE 

deprive it of part of its productivity, and decrease its salubrity. 
Now these facts have been established conclusively. . . . They 
have been observed in France, particularly in Provence, in 
Algiers, in various European countries, such as Austria and 
Italy, and in America also, especially in Brazil. 

Experience proves that private owners generally are very 
much inclined to cut trees, and very little inclined to plant 
them, at least in large quantities. Forest destruction offers 
the allurement, often deceptive, of great increase in the value 
of the land when it is transformed into open fields ; and a great 
number of landowners are seduced by this prospect, especially 
peasants. Upon the other hand, tree planting and sowing 
upon a large scale, since they entail an immediate expense 
which will yield no return until the end of a long period of 
years, are undertaken only by men of foresight and of easy 
circumstances.^ 

19. National Forest Reserves in the United States. — The con- 
ditions just described have led the United States to establish 
national forest reserves of which the following brief account has 
been published by the Forest Service : ^ 

Forest reserves are for the purpose of preserving a perpetual 
supply of timber for home industries, preventing destruction of 
the forest cover which regulates the flow of streams, and pro- 
tecting local residents from unfair competition in the use of 
forest and range. They are patrolled and protected, at govern- 
ment expense, for the benefit of the community and the home 
builder. 

^ At the present day the forest area of the German Empire is about 13,956,000 
hectares. Of this 33.3 per cent belongs to the royal or state forests and 15.6 to 
various local governing bodies. Private owners, individuals, or associations hold 
51. 1 per cent. Elster, Worterbuch der Volkswirthschaft, I, 737. In France the 
forest holdings of the central government amount to about 1,070,000 hectares, and 
those of the communes amount to about 2,058,000 hectares. Bastable, Public 
Finance, 171. From a financial point of view, income from forests is generally not 
important, except in some of the German states. The Prussian budget for 1903 
estimated the gross receipts from forests at 106,854,000 marks, and the net receipts 
at 60,000,000 marks. Bastable, 1 72. — Ed. 

2 The Use of National Forest Reserves, 7-1 1. Pubhshed by the Forest Service 
(1905). 



REVENUES FROM DOMAINS lOI 

We know that the welfare of every community is dependent 
upon a cheap and plentiful supply of timber ; that a forest 
cover is the most effective means of maintaining a regular 
stream flow for irrigation and other useful purposes ; and that 
the permanence of the live-stock industry depends upon the 
conservative use of the range. The injury to all persons 
and industries which results from the destruction of forests 
by fire and careless use is a matter of history in older coun- 
tries, and has long been the cause of anxiety and loss in 
the United States. The protection of the forest resources still 
existing is a matter of urgent local and national importance. 
This is shown by the exhaustion and removal of lumbering cen- 
ters, often leaving behind desolation and depression in business ; 
the vast public and private losses through unnecessary forest 
fires ; the increasing use of lumber per capita by a still more 
rapidly increasing population ; the decrease in the summer flow 
of streams just as they become indispensable to manufacture or 
irrigation ; and the serious decrease in the carrying capacity of 
the summer range. It cannot be doubted that, as President 
Roosevelt has said, " the forest problem is, in many ways, the 
most vital internal problem of the United States." 

As early as 1799 Congress provided for the purchase of 
timber lands to supply the needs of the navy, and in 18 17 further 
legislation directed the setting apart of public lands for the same 
purpose, and provided penalties for the unauthorized cutting of 
any public timber. Other acts, from time to time, made similar 
provisions for setting apart forest land for specific purposes, but 
the first attempt to secure a comprehensive administration of the 
forests on the public domain was in 1871, by a bill introduced 
in the Forty-second Congress, which failed of passage. 

In 1876, ^2,000 was appropriated to employ a competent man to 
investigate timber conditions in the United States, and on June 30, 
1886, an act was approved creating a Division of Forestry in 
the Department of Agriculture. On July i, 1901, this division 
became the Bureau of Forestry (now the Forest Service), em- 
ploying practically all the trained foresters in the United States, 
and engaged in almost every branch of forest work in every 
state and territory, except the actual administration of the gov- 
ernment forest lands. These remained in the Department of the 



102 SELECTED READINGS IN PUBLIC FINANCE 

Interior, which, although possessing complete machinery for the 
disposal of lands, was provided with neither system nor trained 
men for conservative forest management. 

In the meantime, with the increasing realization that the 
nation's timber supply must be protected, and with the immense 
growth of irrigation interests in the West, the necessity for 
retaining permanent federal control over selected forest areas 
was recognized by a brief section inserted in the act of March 3, 
1891, which authorized the President to establish forest reserves. 
The first exercise of this power was in the creation of the Yellow- 
stone Park Timber Land Reserve, proclaimed by President 
Harrison March 30, 1891. 

The mere creation of forest reserves, however, without provi- 
sion for their administration, was both ineffectual and annoying 
to local interests dependent upon their sources. Consequently 
the Secretary of the Interior, 1896, requested the National 
Academy of Sciences to recommend a national forest policy. 
This resulted in the passage of the act of June 4, 1897, under 
which, with several subsequent amendments, forest reserves are 
now administered. 

On the theory that the management of land, not of forests, 
was chiefly involved, this law gave the Secretary of the Interior 
authority over the reserves, and provided that their surveying, 
mapping, and general classification should be done by the United 
States Geological Survey, and the execution of administrative 
work by the General Land Office. 

The result was not satisfactory. The technical and complex 
problems arising from the necessary use of forest and range soon 
demanded the introduction of scientific methods and a techni- 
cally trained force, which could not be provided under the exist- 
ing system. The advice and services of the Bureau of Forestry 
were found necessary, but, under the law, could be but imper- 
fectly utilized. The necessity of consolidating the various* 
branches of government forest work became apparent and was 
urged upon Congress by the President and all the executive 
oflicers concerned. Finally, the act of February i, 1905, trans- 
ferred to the Secretary of Agriculture entire jurisdiction over 
the forest reserves except in matters of surveying and passage 
of title. 

The regulations and instructions for the use of the national 



REVENUES FROM DOMAINS 1 03 

forest reserves here published are in accordance with the act 
last mentioned and with that of March 3, 1905, making appro- 
priations for the Department of Agriculture, w^hich changed the 
Bureau of Forestry into the Forest Service. They are based 
upon the following general policy laid down for the Forest 
Service by the Secretary of Agriculture in his letter of Febru- 
ary I, 1905, to the forester: 

*'In the administration of the forest reserves it must be clearly 
borne in mind that all land is to be devoted to its most productive 
use for the permanent good of the whole people, and not for the 
temporary benefit of individuals or companies. All the resources 
of forest reserves are for use, and this use must be brought about 
in a thoroughly prompt and businesslike manner, under such 
restrictions only as will insure the permanence of these re- 
sources. The vital importance of forest reserves to the great 
industries of the Western states will be largely increased in the 
near future by the continued steady advance in settlement and 
development. The permanence of the resources of the reserves 
is therefore indispensable to continued prosperity, and the policy 
of this department for their protection and use will invariably be 
guided by this fact, always bearing in mind that the conservative 
use of these resources in no way conflicts with their permanent 
value. 

"You will see to it that the water, wood, and forage of the re- 
serves are conserved and wisely used for the benefit of the home 
builder first of all, upon whom depends the best permanent use 
of lands and resources alike. The continued prosperity of the 
agricultural, lumbering, mining, and live-stock interests is di- 
rectly dependent upon a permanent and accessible supply of 
water, wood, and forage, as well as upon the present and future 
use of these resources under businesslike regulations, enforced 
with promptness, effectiveness, and common sense. In the man- 
agement of each reserve local questions will be decided upon 
local grounds ; the dominant industry will be considered first, 
but with as little restriction to minor industries as may be pos- 
sible; sudden changes in industrial conditions will be avoided by 
gradual adjustment after due notice, and where conflicting in- 
terests must be reconciled, the question will always be decided 
from the standpoint of the greatest good of the greatest number 
in the long run." 



CHAPTER VI 

REVENUES FROM PUBLIC INDUSTRIES 

20. The Post Office. — The best-estabhshed and in many cases the 
oldest form of public industry is the postal service, which Adam 
Smith described as "the only mercantile project which has been 
successfully managed ... by every sort of government." The 
history and principles of administration of this branch of public 
business are thus discussed by President A. T. Hadley, of Yale 
University : ^ 

I. History 

The first extensively organized postal service was the cursus 
publicus of the Roman Empire. It was developed in connec- 
tion with the system of Roman roads, and, Uke them, was pri- 
marily intended to subserve military and administrative purposes. 
It amounted to nothing more than a fully equipped set of relay 
stations for the rapid forwarding of official correspondence, not 
for the use of the general public. Traces of it survived the fall 
of the old Roman Empire, and lasted well on into the Middle 
Ages ; but not as an institution with which modern postage can 
be shown to have any historical connection. 

The postal systems which sprang up in the Middle Ages 
were, as might be expected, not centralized, but in the hands of 
local organizations : commercial cities, universities, or orders of 
knights. The city post offices were the earliest organized, and 
in the time of prosperity of the Hanseatic League attained a 
high stage of development. Originally intended for purposes 
of trade communication between the guilds and merchants 
of Westphalia and those on the sea coast, they became an im- 

1 Reprinted, by permission of the author and arrangement with the pubHshers, 
from Lalor's Cyclopaedia of Political Science, III, 306-310. Published by Maynard, 
Merrill, and Company, New York (1883-84). 

104 



REVENUES FROM PUBLIC INDUSTRIES 105 

portant convenience to the general public of Northern Germany. 
The postal arrangements of the universities were developed in 
a similar way. First intended as a channel of communication 
between scholars and their homes, the same facilities were soon 
afforded to others who lived where they could avail themselves 
of them. The most important example of the third class was 
the postal service of the knights of the Teutonic order, extend- 
ing over the northeast of Germany almost as widely as that of 
the Hanse towns over the northwest. 

At the end of the fifteenth century, as centralizing govern- 
ments grew up and supplanted the feudal system, national 
postal service was attempted, and ultimately prevailed. In this, 
as in all other similar matters, France topk the lead. The first 
steps were taken by Louis XI, and they were followed up by 
Charles VI I L The wars of the sixteenth century checked this 
development; but it was resumed under Louis XIII; and in 
168 1 was so far advanced that letter carrying was made a gov- 
ernment monopoly, though largely controlled by private hands 
till the legislation of 1790. In England there are traces of a 
postal service and postal regulations going back to a very early 
time; but the organized business of letter carrying seems to 
date from the reign of James I. It was made a government 
monopoly by the legislation of 1649 ^.nd 1657, although the 
business was farmed out until 1709. 

In the countries ruled by the house of Austria, an interna- 
tional postal system was started under the administration of 
the Taxis family. At the beginning of the sixteenth century 
they estabHshed regular communication between Brussels and 
Vienna ; soon a line was added to Milan and beyond, and not 
long after a further line to Madrid. In 1595 Leonard von Taxis 
received the office of postmaster general of the empire ; and in 
161 5 this dignity was made hereditary. It was much harder to 
establish a monopoly here than in France or England, owing 
to the extent of ground to be covered, the full development of 
special postal services, and the weakness of the imperial author- 
ity. The nominal rights granted by the investiture could only 
be carried into effect by treaties with the individual states; 
and many of these preferred to maintain postal systems of their 
own. This was the case in Austria on the one hand, and in 



io6 SELECTED READINGS IN PUBLIC FINANCE 

Brandenburg (and thus eventually Prussia), as well as many less 
important states of North Germany, on the other. The postal 
service of the Taxis family was thus chiefly exercised in the 
smaller states of Middle and Southern Germany, where it sur- 
vived the fall of the empire, and lasted till 1866. 

A long time elapsed after the governments took control of the 
postal service before they made it efficient The usefulness of 
the English post office dates from the year 1784, when meas- 
ures of reform were introduced by Palmer, the postmaster gen- 
eral, with the warm support of Pitt. Previous to his time the 
mail conveyance had been infrequent, slow, irregular, and utterly 
unsafe. In the eight years of his tenure of office he doubled 
the frequency and speed of conveyance, and secured a reason- 
able degree of regularity and safety, chiefly by the substitution 
of coaches for single riders as a means of carriage. But, though 
the service was much improved, the rates continued exorbitant ; 
so much so that a vast deal of private letter conveyance was 
done, in defiance of government rights. In the years 1830-35 
the pressure in favor of low rates began to make itself felt; 
and the movement in this direction was ably headed by Rowland 
Hill, whose work on ** Postal Reform, its Importance and Prac- 
ticability " appeared in 1837. His proposal to reduce inland 
postage to about one tenth of its former figure was so sweeping 
as to cause a great sensation and not a little opposition ; but the 
idea was carried out in 1840, and the example thus set by Eng- 
land was soon followed by the other civilized nations; though 
generally with gradual instead of sudden reduction. 

The bill which established penny postage also introduced the 
use of postage stamps. The idea was not a new one ; abortive 
attempts to carry it out had been made in France in 1653 and 
1758, in Spain in 1716, in Sardinia in 1819-36. But in connec- 
tion with the reduced postage and increased correspondence 
which followed it, stamps proved of indispensable service ; and 
the example of England in introducing them was, within ten 
years, followed by nearly all prominent states. In the years 
1 869-74 came the still further reduction in price effected by the 
use of postal cards, originating in Austria, 

The postal system of the United States dates from colonial 
times, being specially provided for in the postal act of Queen 



REVENUES FROM PUBLIC INDUSTRIES 107 

Anne's reign ; and its character was not very distinctly changed 
by the separation, or by any causes other than the natural growth 
of the country. Before the passage of the act of 1845, inland 
rates varied from six to twenty-five cents a sheet. The act of 
1845 provided for rates of five and ten cents, according to dis- 
tance; and in 1847 stamps of these denominations were intro- 
duced. In 185 1 postage for nearly all home letters was reduced 
to three cents. ^ 

The detailed history of postal development in different coun- 
tries offers so few peculiarities that it is unnecessary to treat them 
separately. Everywhere we have, first, gradual improvement 
of service ; then, simultaneously, lowering of rates, equalization 
for different distances, introduction of postage stamps, abandon- 
ment of the sheet as the unit of charge, and substitution of a 
unit of weight, at first almost always somewhat below the pres- 
ent half ounce (fifteen grams) standard. By the year 185 1 the 
postal legislation and policy of civilized nations, as far as con- 
cerns home correspondence, had approached near to its present 
shape. 

Not so with foreign correspondence. For a long time nothing 
was done to encourage that, even by those administrations that 
were anxious to extend home faciHties. It was not until 1833 
that a daily mail was established between London and Paris ; 
and even then there was communication but twice a week with 
other parts of the continent. There were discriminating rates 
against foreign correspondence, which were sometimes almost 
prohibitory. The rate for a letter from London to Dover was 
8<f. ; but if it was to be forwarded to France, the charge for the 
same part of the route in 1834 was 1.5-. 2d. ; if intended for Ger- 
many, IS. 8d.; for Italy, is. iid. The ship charge for carrying 
a letter to the United States was six cents, or ^d. ; the rate 
charged by the British post office for delivering such a letter to 
the ship was 2s. 2d. For letters directed to Spain, it was the 
same ; for those to Brazil the inland rate was actually 3^-. 6d. 
The rates of other countries indicated a similar policy. As in- 
ternational correspondence increased, and with it the demand 
for more favorable terms, these high charges could not well be 
reduced without common action on the part of the two nations 

1 Upon October i, 1883, the rate was reduced to two cents. — Ed. 



I08 SELECTED READINGS IN PUBLIC FINANCE 

concerned. Hence resulted a number of postal treaties, among 
which may be mentioned, as leading ones, the system of treaties 
(1840-50) between Austria, Prussia, and the smaller German 
states — many of the latter still represented by the heir of the 
Taxis family ; also the series between France and England. Not 
the least important and delicate matter in some of these treaties 
was the provision concerning charges for letters in transit, to be 
delivered in some third country beyond. By means of these 
treaties the rates between the different nations of Europe were 
gradually reduced. Not so successful was the attempt to reduce 
them between Europe and America. The foreign postage policy 
of the United States had been for a long time exceedingly liberal, 
and it was only the conservatism of England that had prevented 
cheap postage between the two countries. Then at the time 
when England was making her postal reforms at home, steam- 
ships were taking the place of sailing vessels ; and the subsidies 
which England wished to pay the steamship lines made her 
statesmen unwilling to reduce a postage rate which seemed to 
furnish such a suitable means of defraying the expense. Then 
came the adoption of the same system on the part of France, 
and attempts in the same direction in America ; and every effort 
to support a subsidized steamship line lessened the strength of 
the demand for cheap transmarine postage. The United States 
rate for a considerable time was twenty cents, except where 
special arrangements provided otherwise; and these arrange- 
ments were apt to mean higher instead of lower rates. But with 
the abandonment of the Collins line of steamers, the United 
States again took strong ground in favor of lower rates ; and, at 
its suggestion, a conference was held at Paris in 1863, relative 
to common action in the matter of international postage. This 
conference was only deliberative ; it did not do away with the 
necessity of special treaties, though there was a continued low- 
ering of rates in these. A similar conference, to be invested 
with greater powers, was invited to meet at Bern, in 1873 ; but 
as France, on the ground of financial embarrassments, declined 
to take part, it was postponed and reconvened in September, 
1874, when the leading nations were satisfactorily represented. 
In spite of some moderate opposition from France, which was 
hampered by its subsidy system of mail contracts, and in spite 



REVENUES FROM PUBLIC INDUSTRIES 109 

of great lukewarmness on the part of England, public feeling in 
favor of cheap postage was so strong that, on October 9, a postal 
union was formed on a general basis of five cents per half ounce 
letter postage, to go into effect, with some few exceptions, July i, 
1875. Even France agreed that it would ultimately acquiesce in 
this rate. Other nations, not at first included, joined the postal 
union in rapid succession, and in 1878 a second congress was 
held at Bern, which carried out the ideas of the first into the 
shape of a postal union treaty, embracing the following points : 
I, harmonious arrangement of lines for international connection, 
transit, etc. ; 2, avoidance of international competition ; 3, proper 
distribution of expenses, and, if necessary, pooling of receipts ; 
4, international equality of treatment; 5, equality of standards 
of weight, etc. These postal treaties have now been agreed 
to by all Europe and most of the other countries of the world. 
The postal union has a permanent organization at Bern, with its 
regularly published series of reports. 

¥^ ^ ^ y^ ^ ^ ^ 

In this historical account, attention iias been confined to the 
letter post as the most important part of the system. The post 
office has at different times and places attempted the conveyance 
of newspapers, unsealed packages, money, persons, and telegrams ; 
not to speak of matters like postal savings banks, being quite 
aside from its main function. In almost all cases it has done 
so in more or less direct competition with private enterprise : 
though the English government had, up to the year 1840, a 
virtual monopoly of newspaper carriage ; while in many parts 
of the continent of Europe the actual competition in forwarding 
small parcels is not to-day noticeable. The conveyance of 
money has generally been effected under a form like a registered 
letter; but in England the habitual use of cheques led to the 
early development (1838) of the post office money order, which 
was slow in making its way into other countries. The rapid 
conveyance of persons from place to place by government post- 
ing arrangements, was at one time almost as important,- at least 
in the eyes of the authorities, as the conveyance of letters ; but it, 
of course, nearly fell away with the introduction of railways, 
except in the few countries, like Norway, which combine con- 
siderable demand for comniunication with the impracticability 



no SELECTED READINGS IN PUBLIC FINANCE 

of railways. On the other hand, postal telegraphy seems des- 
tined to grow in importance. In many countries of Europe the 
telegraph was from the beginning developed in connection with 
the post office ; while in England it was brought under its control 
in 1870. 

II. Principles of Administration 

The question whether the state should control the post office 
need not be seriously discussed as an open one. Our ex- 
perience with railroads has shown what we may expect from 
private management in affairs of this kind — unsteadiness and 
discrimination of rates, and development of competing and 
favored points at the expense of all others. When it is impos- 
sible to avoid this in transportation, unless by combinations and 
monopolies no less dangerous than the evil itself, it can hardly 
be seriously proposed to introduce it into the system of postal 
communication. On the other hand, the question as to how 
far the post office should extend its activity to the conveyance 
of parcels, telegrams, etc., cannot be adequately treated here; 
partly because the necessity changes so entirely with varying 
local conditions, partly because special technical reasons are in- 
volved, to which justice can be done only in separate articles. 

Setting these points aside, we have two distinct series of 
questions to deal with : first, as to the financial or administra- 
tive aims with which the post office should be conducted ; 
second, as to the means to be employed for securing those aims. 
Of the two, the first is more difficult, and at the same time of 
more general importance and interest. 

We see in the history of the institution that the post office was 
taken up by governments far more with a view of strengthening 
their own position than for the convenience of their subjects. 
This was equally the case whether they used it exclusively for 
their own business, as in Rome, or for the sake of getting 
administrative control into their hands, as in France. This 
carelessness of public interest led to its management under 
systems of lease or investiture, whatever means would secure 
money or influence with the least trouble. That state of things 
was outgrown in the last century, and men attained to the con- 
ception (though -not always to the reality) of the postal service 



REVENUES FROM PUBLIC INDUSTRIES III 

as a public interest ; to be managed directly by the state for the 
public advantage. But the particular form of public advan- 
tage to be aimed at was not yet settled. The post office might 
be managed in any one of four ways : i, as a tax; 2, to yield 
good business profit ; 3, to pay expenses ; 4, to best accommodate 
the public. On the whole, the third of these principles is tend- 
ing to prevail, but there has been, and is still, much deviation 
from it. 

1. The use of the post office as a means of taxation was an 
idea belonging distinctly to the earHer period, now outgrown. 
Yet, in practice, the lowering of rates was so slow that the gov- 
ernment monopoly at the charges ruling previous to 1840 had 
all the characteristics of a tax, and of one placed at the highest 
limit the business would bear ; making itself felt not so much by 
the amount of money collected as by the means adopted to evade 
payment, by keeping correspondence within narrow limits or 
forwarding it by illegal agencies. The discriminating rates 
against foreign postage were still more obviously of the nature 
of a tax, and were felt to be so when connected with the sub- 
sidy system ; so that the abandonment of the principle of man- 
aging the post office as a tax cannot be said to have been 
complete till the final lowering of rates by France and Italy 
subsequent to the postal congress of 1878. 

2. The idea of managing the post office to obtain business 
profits is much more plausible, and in those branches of the 
postal service which come into competition with private agencies, 
such as express companies, is probably sound. But in letter 
carrying, where there is a government monopoly, it is liable to 
misapplication in two ways. First, the absence of competition 
leaves the decision as to what constitutes a good business profit 
in the hands of the post office authories, who, in the uncertain 
conditions and bases of calculation, have every motive to aim 
too high, and thus give the result the character of a tax ; "and, 
second, the absence of outside control of rates makes it natural 
for the authorities to secure the required excess of income over 
expenditure by doing a small business at high charges, instead 
of a large business at low charges. As a matter of fact, business 
profits under a government monopoly are not clearly distinguish- 
able from taxes. Compare the arguments used (1835-50) 



112 SELECTED READINGS IN PUBLIC FINANCE 

against lowering postal rates with the results which actually fol- 
lowed such lowering. The most marked instance of reduction 
and its consequences may be taken from Rowland Hill's reform, by 
which postage was reduced to one tenth its former figure. The 
financial showing did not quite realize Hill's anticipations, partly 
on account of a change in the legislation respecting newspapers ; 
nevertheless, the department continued to do much more than 
pay expenses ; its gross income reached its former figure in 
ten years, its net income in about thirty years ; and in the last 
case the department was serving the public by carrying fourteen 
times as many letters as in 1839. The system of business 
profits is, however, in large measure maintained both in 
England and France.^ 

3. The idea of managing the post office simply to pay ex- 
penses gained hold in connection with the reforms of 1840. 
Even those writers who, from a financial standpoint, criticise the 
suddenness of Hill's change, and prefer the continental and 
American policy of gradual reduction, do so on account of the 
evils of suddenly shifting the burdens of taxation rather than 
from any objection to the principle itself. Yet, while their 
theorists hold this view, in practice most European states so far 
keep to the older policy as to secure a slight excess of income 
over expenditure in this department ; perhaps, in general, not 
more than would meet interest on the cost of buildings. The 
disadvantages of the profits principle have been already set 
forth ; the corresponding advantages of the cost principle are : 
first, that it takes away the uncertainty as to the result to be 
striven for; and, second, that it furnishes a tangible basis on 
which the rates are likely to be computed, with due regard to 
the public interest. 

4. To carry letters without paying expenses (that is to say, 
below cost) is to tax the general public for the sake of a special 
service ; usually a thing to be avoided. Yet, there are consider- 
ations which sometimes make it necessary to proceed on this 
principle. In countries like the United States or Russia, there 

1 In England, in 1904, the net revenue of the post office proper was ^4,644,000 ; 
then after meeting a deficit in the department of telegraphs, the net revenue still 
stood at ;^3,66o,ooo. In France, in 1902, the net revenue from posts and telegraph 
was 66,120,000 francs. — Ed. 



REVENUES FROM PUBLIC INDUSTRIES 113 

are strong social and administrative reasons for establishing 
long routes over sparsely populated districts. These involve 
a large increase in expense, with no corresponding increase in 
revenue, whatever rate of postage is charged upon them. They 
have often caused a postal deficit in Russia, and almost always 
in the United States. If the expense of these routes causes a 
deficit in the whole department when the rates of postage are 
moderate, the additional income which could be obtained by 
higher postal rates would not be likely to cover it, because 
higher postal rates mean fewer letters. Thus the government 
must be prepared to meet the deficit. But — to take another 
consideration — suppose that the deficit could be met by higher 
rates. Suppose that in America by such rates a surplus could 
be obtained in the already self-sustaining East, sufficient to meet 
deficits in the South and West,^ or that such surplus could be 
obtained upon the main routes as to meet deficits upon the 
minor ones. What then ? Such a proceeding would be a tax 
upon the correspondence of one section for the benefit of an- 
other. The interests subserved by such routes are not the 
postal interests. They are the general interests of the country ; 
and to force the postage returns of other sections to pay for 
this service is to intensify the unfairness of taxation which it is 
intended to avoid. Thus the principle now generally favored is, 
that the post office should aim to pay expenses ; but the tradi- 
tional practice of European administrations is to make it do some- 
what more ; and the special circumstances of the United States 
have justified the practice of allowing it to do somewhat less.^ 

How shall the rates be adjusted in accordance with the finan- 
cial principle chosen ? is the second question. Under the older 
systems of taxation or profit, the rate was carried as high as the 
business would bear, and often higher, with the result of caus- 

1 In a recent year the gross receipts of all post offices were ^139,586,000. Of this 
sum, $10,000,000 was collected in Massachusetts and Connecticut ; $41,300,000 in 
New York, New Jersey, Pennsylvania, and Maryland ; $34,400,000 in Ohio, Indiana, 
Illinois, Michigan, and Wisconsin. These eleven states furnished $85,700,000, or 
about 61 per cent of the total post-office revenue. — Ed. 

2 In the United States the postal revenues uniformly exceeded the expenditures 
from 1789 to 1819 ; so that during that period the post office earned a profit of 
$1,642,000. From 1820 to 1852, there were thirteen years in which there was a 
surplus, and nineteen in which there was a deficit ; the entire period of thirty-two 



114 SELECTED READINGS IN PUBLIC FINANCE 

ing much smuggling. On those principles they-^ of course 
charged much more for long routes than for short ones. Until 
1845 the United States minimum charges were as follows: 
under 30 miles, 6 cents; under 80 miles, 10 cents; under 150 
miles, 12J cents; under 400 miles, i8| cents; over 400 miles, 
25 cents. Yet, even at this time, before the development of 
railways to any extent, it was computed that the cost of trans- 
mission of letters constituted less than two sevenths of the 
whole, and the cost of collection and delivery more than five 



years showing a very slight deficit; so that practically revenue balanced expenditure. 
From 1852 to the present time there has generally been a deficit as shown by the 
following table of the money paid out of the United States Treasury to meet deficien- 
cies in the postal revenues : 

(In thousands of dollars) 



1852 ...... 1,741 

1853 2,255 

1854 2,736 

1855 3.114 

1856 3,748 

1857 4.528 

1858 4,679 

1859 3.915 

i860 iiji54 

1861 4.639 

1862 2,598 

1863 i,do7 

1864 749 

1865 3 

1866 ...... — 

1867 3,991 

1868 5,696 

1869 5.707 

1870 4,022 



1871 
1872 

1873 
1874 
1875 
1876 
1877 
1878 



4,126 
4.993 
5.990 
5,922 
6,704 
5,088 
7.013 
5.307 



1879 ... 


. ^ 3.297 


1880 ... 


. 3.597 


I88I .... 


• 3.297 


1882 .... 


6 


1883 .... 


21 


1884 .... 


140 


1885 .... 


. 6,066 


1886 .... 


. . 8,751 


1887 .... 


. 4,746 


1888 .... 


3.386 


1889 . . . 


. • 5.745 


1890 .... 


. 6,100 


I89I .... 


. . 4,441 


1892 . C . 


. 6,260 


1893 .... 


. 6,727 


1894 .... 


. 10,200 


1895 .... 


. . 9,872 


1896 .... 


. 8,830 


1897 .... 


. 12,133 


1898 .... 


. 9.341 


1899 . . .' 


. 7.902 


1900 .... 


. 6,250 


1901 .... 


. 4.001 


1902 .... 


. 2,490 


1903 , . . . 


. 3.753 


1904 . , . . . 


. 7.631 



It will be observed that the deficit had been ^educed to small proportions just prior 
to the reduction of the rate of letter postage in 1883. — Ed. 



REVENUES FROM PUBLIC INDUSTRIES " 1 15 

sevenths. Compared with what it would cost the sender to 
evade payment, the differential rates were just; compared with 
what it cost to perform the service, they were absurd. And, as 
time went on, the absurdity increased. Improved means of 
communication rendered the whole cost of transmission a less 
important element; rapid increase of communication between 
distant places still further reduced differences in the cost of 
transmission. And with the rising feeling in favor of a system 
based on expense, not on profit —" freight, not tax," in the 
words of the day — a gradual equalization of rates for differ- 
ent distances was inevitable. On the continent of Europe, there 
was, for like reasons, a similar tendency, partially carried out, 
to do away with weight as an element in letter postage. This 
idea never took much hold in America, unless we regard the 
treatment of books and newspapers as an instance of it. There 
is no inherent reason why the post office should prefer to carry 
printed matter rather than written matter of the same weight. 
But printed matter, being habitually sent in large parcels, was, 
weight for weight, far easier to handle ; especially so in the case 
of papers which went from day to day on the same routes in 
about equal quantities. Moreover, monopoly rates had never 
taken firm root here, owing to the competition of private 
agencies in the delivery of unsealed matter. All these rea- 
sons combined to produce the lower rates on those classes of 
goods. 

These practical ideas are followed out in the inland postage 
of almost all civilized countries, whether the results are such as 
to more than cover or slightly less than cover the expense. In 
international postage it is sometimes difficult to carry them out 
with fairness. The five-cent rate was based on a rough average 
of transmission expenditures ; and countries unfortunately situ- 
ated or organized maybe unable to meet their foreign postal 
expenses on this rate. The general advantages of belonging 
to the postal union are a sufficient compensation for such of 
these inequalities as cannot be satisfactorily arranged. 

21. The Post OflSce and Other Industries. — In 1867 Professor 
Jevons published the following paper upon **The Analogy be- 
tween the Post Office, Telegraphs, and other Systems of Con- 



Il6 SELECTED READINGS IN PUBLIC FINANCE 

veyance in the United Kingdom in regard to Government 
Control":! 

m 

It has been freely suggested of late years, that great public 
advantage would arise from the purchase and reorganization of 
the electric telegraphs and railways of the United Kingdom, 
by the government. So inestimable, indeed, are the benefits 
which the post office, as reformed by Sir Rowland Hill, con- 
fers upon all classes of society, that there is a great tendency 
to desire the application of a similar reform and state organiza- 
tion, to other systems of conveyance. It is assumed, by most of 
those who discuss this subject, that there is a close similarity be- 
tween the post office, telegraphs, and railways, and that what 
has answered so admirably in one case, will be productive of 
similar results in other parallel cases. Without adopting any 
foregone conclusion, it is my desire, in this short paper, to in- 
quire into the existence and grounds of this assumed analogy, 
and to make such a general comparison of the conditions and 
requirements of each branch of conveyance, as will enable us 
to judge securely, of the expediency of state control in each 
case. 

Much difference of opinion arises, even in a purely economi- 
cal point of view, upon the question of the limit of state interfer- 
ences. My own strong opinion is that no abstract principle, 
and no absolute rule, can guide us in determining what kinds 
of industrial enterprise the state should undertake, and what 
it should not. State manag-ement and monopoly have most 
indisputable advantages ; private commercial enterprise and 
responsibility have still more unquestionable advantages. The 
two are directly antagonistic. Nothing but experience and argu- 
ment from experience can in most cases determine whether the 
community will be best served by its collective state action, or 
by trusting to private self-interest. 

On the one hand, it is but too sure that some of the state manu- 
facturing establishments, especially the dockyards, form the very 

1 Reprinted from the Transactions of the Manchester Statistical Society, 1866- 
67, pp. 89-103. This essay was later included in Jevon='s Methods of Social 
Reform (1883). 



REVENUES FROM PUBLIC INDUSTRIES 1 17 

types of incompetent and wasteful expenditure. They are the 
running sores of the country, draining away our financial power. 
It is evident too that the House of Commons is at present quite 
incapable of controlling the expenditure of the dockyards. And 
as these establishments are never subjected to the test of com- 
mercial solvency, as they do not furnish intelligible accounts of 
current expenditure and work done, much less favor us with 
any account or allowance for capital expenditure, we have no 
security whatever that the work is done cheaply. And the 
worst point is, that even if government establishments of this 
kind are efficiently conducted when new and while the public 
attention is on them, we have no security that this state of things 
will continue. 

To other government establishments, however, the post office 
presents a singular and at first sight an unaccountable contrast. 
Instead of Mr. Dickens's picture of the Circumlocution Office, 
we are here presented with a body of secretaries and postmas- 
ters alive to every breath of public opinion or private complaint, 
officials laboriously correcting the blunders and returning the 
property of careless letter writers ; and clerks, sorters, and post- 
men working to their utmost that the public may be served ex- 
peditiously. No one ever charges the post office with lavish 
expenditure and inefficient performance of duties. 

It seems then that the extremes of efficiency and inefficiency 
meet in the public service, and before we undertake any new 
branch of state industry, it becomes very important to ascertain 
whether it is of a kind likely to fall into the efficient or inefficient 
class of undertakings. Before we give our adhesion to systems 
of state telegraphs and state railways in this kingdom, we should 
closely inquire whether telegraphs and railways have more anal- 
ogy to the post office or to the dockyards. This argument from 
analogy is freely used by every one. It is the argument of the 
so-called reformers, who urge that if we treat the telegraphs 
and the railways, as Sir Rowland Hill treated the post office, 
reducing fares to a low and uniform rate, we shall reap the same 
gratifying results. But this will depend upon whether the anal- 
ogy is correct — whether the telegraphs and railways resemble 
the post office in those conditions which render the latter highly 
successful in the hands of government, and enable a low uniform 



Ii8 SELECTED READINGS IN PUBLIC FINANCE 

rate to be adopted. To this point the following remarks are 
directed. 

It seems to me that state management possesses advantages 
under the following conditions : 

1. Where numberless widespreac^ operations can only be 
efficiently connected, united, and coordinated, in a single, all- 
extensive government system. 

2. Where the operations possess an invariable, routine-like 
character. 

3. Where they are performed under the public eye or for the 
service of individuals, who will immediately detect and expose 
any failure or laxity. 

4. Where there is but little capital expenditure, so that each 
year's revenue and expense account shall represent, with suffi- 
cient accuracy, the real commercial conditions of the department.^ 

It is apparent that all these conditions are combined in the 
highest perfection in the post office. It is a vast, coordinated 
system, such as no private capitalists could maintain, unless, 
indeed, they were in undisputed possession of the field, by vir- 
tue of a government monopoly. The forwarding of letters is a 
purely routine and equable operation. Not a letter can be mis- 
laid but some one will become aware of it, and by the published 
tables of mail departures and arrivals the public is enabled 
accurately to check the performance of the system. 

Its capital expenditure too is insignificant compared with its 
current expenditure. Like other government departments, 
indeed, the post office does not favor us with any statement of 
the capital value of its buildings, fittings, etc. But in the 
post-office accounts, we have a statement of the annual cost of 
buildings and repairs, together with rents, rates, taxes, fuel, 
and lights. In the last ten years (1856-65) the expense 

^ It will be interesting to note the following comment which President Hadley 
has made upon the criteria here suggested by Jevons : 

" All this is good as far as it goes ; but it leaves the heart of the difficulty 
untouched. Passing over the first of these points, which really begs the whole 
question, we have before us, not an indication of the conditions under which a 
government can manage an industry with the best advantage, but of those under 
which its management is attended with the least danger. Jevons's principles are 
restrictive and not positive. They show how far you can trust the government with- 
out serious danger of financial mismanagement." Hadley, Economics, 398. — Ed. 



1 



REVENUES FROM PUBLIC INDUSTRIES 1 19 

has varied from ^^39,730 in 1864 to ;£ 106,478 in 1859, and 
the average yearly expense has been £,'j2,dfZ6y which bears 
a very inconsiderable ratio to ;£ 1,303,064, the average cost of 
the post office staff during the same years. Compared with 
^2,871,729, the average complete expenditure of the post office 
during the last ten years, the cost of the fixed property of 
the department is quite inconsiderable. This very favorable 
state of things is due to the fact, that all the conveyances of the 
post office system are furnished by contract, while it is only the 
large central offices that are owned by government. 

Before proceeding to consider the other systems of convey- 
ance, I must notice that the post office in reality is neither a 
commercial nor a philanthropic establishment, but simply one 
of the revenue departments of the government. It very rightly 
insists that no country post office shall be established unless the 
correspondence passing through it shall warrant the increased 
expense, and it maintains a tariff which has no accordance- 
whatever with the cost of conveyance. Books, newspapers, 
and even unsealed manuscripts can be sent up to -the weight 
of four ounces for one penny ; whereas, if a sealed letter in the 
least exceeds one half ounce, it is charged twopence.^ It is 
obvious that the charges of the post office are for the most 
part a purely arbitrary system of taxes, designed to maintain 
the large net revenue of the post office now amounting to a 
million and a half sterling.^ 

It will thus be apparent that Sir Rowland Hill's scheme of 
postal tariff consisted in substituting one arbitrary system of 
charges for a system more arbitrary and onerous. This was 
effected by the sacrifice, at the time, of about one million ster- 
ling of revenue ; but it must be distinctly remembered that it 
was net revenue only which was sacrificed, and not commercial 
loss which was incurred. 

A telegraph system appears to me to possess the character- 
istics which favor unity and state management almost in as 
high a degree as the post office. If this be so, great advan- 
tages will undoubtedly be attained by the purchase of the tele- 

^ In 1871 the limit was raised to one ounce, and in 1897 to four ounces. Cf. Pal- 
grave, Dictionary of Political Economy, III, 175. — Ed, 
^ In 1901-02 the net revenue was ;^3,999,ooo, — Ed^ 



120 SELECTED READINGS IN PUBLIC FINANCE 

graphs and their union under the direction of the post office 
department. 

It is obvious, in the first place, that the public will be able, 
and in fact obliged, constantly to test the efficiency of the pro- 
posed government telegraphs, as they now test the efficiency 
of the post office. The least delay or inaccuracy in the trans- 
mission of messages will become known, and will be made the 
ground of complaint. The work, too, of receiving, transmitting, 
and delivering messages, is for the most part of an entirely 
routine nature, as in the case of the post office. The only 
exception to this consists perhaps in the special arrangements 
which will be needed for the transmission of intelligence and 
reports to the newspapers. 

It is hardly necessary to point out in the second place that 
a single government telegraph system will possess great advan- 
tages from its unity, economy, and comprehensive character. 
Instead of two or three companies with parallel conterminous 
wires, and different sets of costly city stations, we shall have a 
single set of stations ; and the very same wires, when aggre- 
gated into one body, will admit of more convenient arrange- 
ments and more economical employment. The greater the 
number of messages sent through a given office, the more regu- 
larly and economically may the work of transmission and 
delivery be performed in general. 

Furthermore, great advantages will arise from an intimate 
connection between the telegraphs and the post office. In the 
country districts the telegraph office can readily be placed in 
the post office, and the postmaster can, for a moderate remu- 
neration, be induced to act as telegraphic clerk, just as small 
railway stations serve as telegraphic offices at present, the sta- 
tion master or clerk being the operator. A great number of 
new offices could thus be opened without any considerable ex- 
penses for rent or attendance. The government, in short, could 
profitably extend its wires where any one of several competing 
companies would not be induced to go. 

In all the larger towns the cost of special delivery may, per- 
haps, be removed by throwing the telegrams into the ordinary 
postal delivery. It is understood that a scheme for the junc- 
tion of the telegraphic and postal system has been elaborated 



REVENUES FROM PUBLIC INDUSTRIES 121 

by the authorities of the post office, partly on the model of the 
Belgian service ; and it has been asserted that the scheme would 
comprehend some sort of periodical deliveries. In the great 
business centers, at least, very frequent periodical deliveries 
could be made. For the services of a special messenger, an 
extra charge might be imposed. Prepayment of all ordinary 
charges by stamps would greatly facilitate the whole of the 
arrangements ; and it has been suggested, that where there is 
no telegraph office, a prepaid telegram might be deposited in 
the nearest post office or letter box, and forwarded by the mail 
service to the nearest telegraph office, as is the practice in Bel- 
gium. It is evident that the number of telegrams will be 
increased, as the facility for their dispatch, by the united 
system of posts and telegraphs, is greater, 

A low and perhaps uniform tariff would complete the advan- 
tages of such a system. It is supposed, indeed, that it would 
not be prudent at first to attempt a lower uniform rate than one 
shilling for twenty words, but it is difficult to see how an 
uniform rate of this amount can be enforced, when the London 
District Telegraph Company for many years transmitted mes- 
sages for sixpence, or even fourpence. 

The question here arises, how far the telegraphs resemble 
the post office in the financial principles which should govern 
the tariff. The trouble of writing a telegraphic message of 
twenty words is so slight that the trouble of conveying it to a 
telegraph office and the cost of transmission form the only 
impediments to a greatly increased use of this means of com- 
munication. The trouble of dispatching a message will 
undoubtedly be much decreased in most localities by the gov- 
ernment scheme, and if the charge were also decreased, we 
might expect an increase of communications almost comparable 
with that of the post office under similar circumstances. Even 
a shilling rate is prohibitory to all but commercial and necessary 
communications, the post office being a sufficient resource, 
where the urgency is not immediate. Accordingly it is found 
that a reduction of charges increases the use of the telegraphs 
very much. In the Paris telegraphs a reduction of the charge 
from one franc to half a franc has multiplied the business 
tenfold. 



122 SELECTED READINGS IN PUBLIC FINANCE 

But it must be allowed that the working expense of the elec- 
tric telegraph is its weak point. The London District Telegraph 
Company has not succeeded in paying dividends, although their 
low charges brought plenty of business. The French lines are 
worked at a considerable loss to the government. Belgium is 
a country of very small area, which decreases the expense of 
the telegraphs, and yet the reduction of rate has caused a sacri- 
fice of net revenue, only partially made up by the higher profits 
upon international messages in transit. 

It is quite apparent that the telegraphs are less favorably 
situated than the post ofifice as regards the cost of transmission. 
Two letters are as easily carried and delivered at one house as 
a single letter, and it is certain that the expenses of the post 
office do not increase in anything like the same ratio as the 
work it performs. Thus while the total postal revenue has 
increased from ;£3,035,954 in 1856 to ^4,42^,608 in 1865, 
or by 46 per cent, representing a great increase of work done, 
the total cost of the service has risen only from ^^2,438,732 in 
1856 to ;£2,94i,o86 in 1865, or by 21 per cent. In the case 
of the telegraphs, however, two messages with delivery by 
special messenger, cause just twice the trouble of one message. 
The post office, by periodical deliveries, may reduce the cost of 
delivery on its own principles, but it cannot apply these prin-. 
ciples to the actual operations of telegraphy; it cannot send a 
hundred messages at the same cost and in the same time as 
one, as it can send one hundred letters in a bag almost as 
easily as one letter. It is true that the rapidity of transmission 
of messages through a wire can be greatly increased by the use 
of Bain's telegraph, or any of the numerous instruments in which 
the signals are made by a perforated slip of paper, or a set of 
type prepared beforehand. But these inventions economize 
the wires only, not the labor of the operators, since it takes as 
much time and labor to set up the message in type or perfor- 
ated paper as to transmit it direct by the common instrument. 
Economy is to be found, rather, in some simple rapid instru- 
ment of direct transmission, like the acoustic telegraph, than in 
any elaborate mechanical method of signaling. There is no 
reason, so far as we can see at present, to suppose that a gov- 
ernment department will realize any extraordinary economy in 



REVENUES FROM PUBLIC INDUSTRIES 123 

the actual business of transmission. The number of instru- 
ments and the number of operators must be increased in some- 
thing like the same proportion as the messages. And as every 
mile of wire, too, costs a definite sum to construct and maintain 
in repair, it follows that strictly speaking the cost of trans- 
mission of each message consists of a certain uniform terminal 
cost with a second small charge for wires and electricity, pro- 
portional to the distance. 

It will be apparent, from these considerations, that we must 
not rashly apply to the telegraphs the principles so admirably 
set forth by Sir Rowland Hill, in his celebrated pamphlet on the 
post office. When the financial conditions of the telegraphs are 
in many points so different from those of the post office, we can- 
not possibly look for any reduction of charges, to such an extent 
as he proposed in the case of the post office. Whatever reduc- 
tion may be found possible will arise rather from adventitious 
points in the scheme, the economy in office accommodation, the 
aid of the post office in delivery, and so forth. 

Under these circumstances it would doubtless be prudent not 
to attempt any great reduction of charges at first, and if we 
might eventually hope for a sixpenny rate for twenty words, it 
is certainly the lowest that we have any grounds at present for 
anticipating. And though uniformity of charge is very con- 
venient, it must be understood that it is founded on convenience 
only, and it seems to me quite open to question whether complete 
uniformity is expedient in the case of the telegraphs. 

So far, we have, on the whole, found the telegraph highly 
suitable for government organization. The only further requisite 
condition is that, as in the post office, no great amount of prop- 
erty should be placed in the care of government officials. If 
experience is to be our guide, it must be allowed that any large 
government property will be mismanaged, and that no proper 
commercial accounts will be rendered of the amount due to 
interest, repairs, and depreciation of such property. It is desir- 
able that a government department should not require a capital 
account at all, which may be either from the capital stock being 
inconsiderable in amount, or from its being out of the hands and 
care of government officials. Now this condition can fortunately 
be observed in the telegraph system. The total fixed capital of 



124 SELECTED READINGS IN PUBLIC FINANCE 

the telegraph companies at present existing is of but small 
amount. I find the paid-up capital of the five companies con- 
cerned to be as follows : 



Electric and International 
British and Irish Magnetic 
United Kingdom 
Private Telegraph Company 
London District Company 

Total paid-up capital 



;^i, 084,925 
621,456 

143,755 
95,822 

53»70o 

;^i,999,658 



The above statement includes, I believe, all the actual working 
public telegraphs within the United Kingdom, except those 
which the London^, Brighton, and South Coast, and the South 
Eastern Railway companies maintain for public use upon their 
lines. With the value of these I am not acquainted. 

Omitting the Private Telegraph Company as not likely to be 
included in the government purchase, and having regard to the 
premium which the shares of the Electric and International 
Company obtain in the market, and the greater or less deprecia- 
tion of the other companies' shares, I conceive that the complete 
purchase money of the existing telegraphs would not much exceed 
two and a half millions sterling.^ 

To allow for the improvement of the present telegraphs, and 
their extension to many villages which do not at present possess 
a telegraph station, an equal sum of two and a half milHons will 
probably be ample allowance for the present. The total capital 
cost of the telegraphs will, indeed, exceed many times the value 
of the property actually in the hands of the post office, but then 
we must remember that the latter is but a very small part of the 
capital, by which the business of the post office is carried on. 
The railways, steamboats, mail coaches, and an indefinite num- 
ber of hired vehicles, form the apparatus of the postal convey- 
ance, which is all furnished by contract at a total cost in 1865 
of ;£"i, 516,142. The property concerned in the service of the 
post office is in fact gigantic, but it is happily removed from the 

^ As a matter of fact, when the purchase was effected in 1870, three or four 
years after this essay was written, the government paid no less than ;^io, 130,000. 
This excessive purchase price together with a pressure for low rates has made the 
venture less successful financially than Jevons anticipated. These facts were dis- 
cussed by Jevons in a later article. Cf. Methods of Social Reform, 293-306. — Ed, 



REVENUES FROM PUBLIC INDUSTRIES 125 

care and ownership of government. Now this condition fortu- 
nately can be observed in the government telegraphs. 

The construction and maintenance of telegraph wires and in- 
struments is most peculiarly suitable for performance by contract. 
The staff who construct and repair the wires and instruments 
is quite distinct from those who use them, and there need be 
no direct communication or unity of organization between the 
two. Just as a railway company engages to furnish the post 
office with a mail train at the required hour each day, so it will 
be easy for a contractor to furnish and maintain a wire between 
any two given points. And it is obvious that the cost of a wire 
or instrument, and even the charge for the supply of electricity, 
can be so easily determined, and are so little liable to varia- 
tion, that scarcely any opportunity will arise for fraud or 
mismanagement. 

There is a company already existing, called the Telegraph 
Construction and Maintenance Company, which is chiefly en- 
gaged in laying submarine telegraphs, a work of far more haz- 
ardous character, but which it has carried on successfully and 
profitably. And it is certain that, if it were thought desirable, 
some body of capitalists would be found ready to construct, hold, 
and maintain in repair the whole apparatus required in the 
government service, at fixed moderate charges. Thus would 
be preserved in completeness those conditions under which the 
post office has worked with such preeminent success. 

It can hardly be doubted then that if the electric telegraphs 
of this kingdom were purchased by the government, and placed in 
the hands of a branch of the post office department, to be managed 
in partial union with the letter post, and under the same condi- 
tions of efficiency and economy, very gratifying results would be 
attained, and no loss incurred. But, inasmuch as the analogy of 
the telegraphs and post office fails in a very important point, 
that of the expense of transmission, we should guard against 
exaggerated expectations, and should not press for any such re- 
duction of rates as would land us in a financial loss, not justified 
by any economical principles. 

******* 

Some persons might possibly be opposed to this extension of 
government interference and patronage, as being not so much in 



126 SELECTED READINGS IN PUBLIC FINANCE 

itself undesirable, as likely to lead to a greater and more hazardous 
enterprise — the purchase and reorganization of the railways. 

It is well known that opinions have been freely expressed and 
discussed in favor of extending government management to the 
whole railway property of the United Kingdom. I should not 
like to say that this should never be done, and there are doubt- 
less anomalies and hardships in the present state of our railway 
system, which demand legislative remedy. But after studying 
Mr. Gait's work on railway reform and attending to much that 
has been current on the subject, I am yet inclined to think that 
the actual working of our railways by government department 
is altogether out of the question while our English government 
service remains what it is. 

The advantages which might be derived from a single united 
administration of all the railways are doubtless somewhat analo- 
gous to those we derive from the post office, but in most other 
respects the analogy fails completely and fatally. Railway 
traffic cannot be managed by pure routine like that of the mails. 
It is fluctuating and uncertain, dependent upon the seasons of 
the year, the demands of the locality, or events of an accidental 
character. Incessant watchfulness, alacrity, and freedom from 
official routine are required on the part of a traffic manager, 
who shall always be ready to meet the public wants. 

The moment we consider the vast capital concerned in rail- 
ways, and the intricacy of the mechanism and arrangements 
required to conduct the traffic, we must see the danger of man- 
agement by a department of the English government. The 
paid-up capital of the railways of the United Kingdom, includ- 
ing the outstanding debenture loans, amounted in 1865 to 
;£455, 478,143 ; whereas the current working expenses of the 
year were only ;£"i 7, 149,073, or 3^ per cent of the capital cost. 
More than half the receipts, or 52 per cent, go to pay a very 
moderate dividend of about 4^ per cent (4.46 per cent in 1865) 
on the enormous capital involved. The railways are altogether 
contrary in condition, then, to the post office, where the capital 
expense was quite inconsiderable compared with the current 
expense. And I think I am justified in saying, that until the 
EngHsh government returns reliable accounts of the commercial 
results of the dockyards and other manufacturing establish- 



REVENUES FROM PUBLIC INDUSTRIES 127 

ments, and shows that they are economically conducted, it 
cannot be intrusted with the vast and various property of the 
railways. 

It has been suggested, indeed, that a government department 
would conduct the traffic of the railways by contract ; but I am 
unable to see how this could be safely done. The care of the 
permanent way might perhaps thus be provided for, though not 
so easily as in the case of telegraph wires. But the other 
branches of railway service are so numerous and so dependent 
upon each other that they must be under one administration. 
As to the proposal to break the railways up into sections, and 
commit each to the management of a contractor, it seems to me 
to destroy in great part the advantages of unity of management, 
and to sacrifice much that is admirable in the present organiza- 
tion of our great companies. I am far from regarding our 
present railway system as perfect ; but its conditions and re- 
quirements seem to me so entirely contrary to those of the post 
office that I must regard most of the arguments hitherto 
adduced in favor of state management as misleading. 

I may add that should a government system of telegraphs 
prove successful, and should the public desire to extend state 
management still further, there is a most important and profit- 
able field for its employment in the conveyance of parcels and 
light goods. Prussia possesses a complete system of parcel 
posts, and the Scandinavian kingdoms, Switzerland, and possi- 
bly other continental countries, have something of the sort. 
In this country the railways collect, convey, and often deliver 
parcels for high and arbitrary charges ; a number of parcels' 
companies compete with the railways and with each other. An 
almost infinite number of local carriers circulate through the 
suburban and country roads in an entirely unorganized manner. 
The want of organization is remedied to a slight extent by the 
practice of passing parcels from one carrier to another in a 
haphazard sort of way, but at each, step the parcel incurs a 
new, uncertain, and generally large charge. A vast loss of 
efficiency is incurred on the one hand by the parallel deliveries 
of a number of companies in each town, and on the other hand 
by the disconnected services of the private carriers. A govern- 
ment system of conveyance, formed on the model of the post 



128 SELECTED READINGS IN PUBLIC FINANCE 

office, collecting, conveying, and distributing parcels and light 
goods, by one united and all-extensive system, at fixed and well- 
known charges, and carrying out this work by contract with the 
railways and with the owners of the carriers' carts in all parts 
of town and country, would confer vast benefits on the com- 
munity, and at the same time contribute a handsome addition 
to the revenue. It would tend to introduce immense economy 
and efficiency into the retail trade of the kingdom, bringing the 
remotest country resident into communication with the best city 
shops. It would lighten the work of the post office, by taking 
off the less profitable and more weighty book parcels ; and it 
would, in many ways, form the natural complement to our tele- 
graph, postal, and money-order system. But a scheme of this 
sort is of course entirely prospective, and it seems to me suffi- 
cient for the present for the government and parliament to 
consider whether the reasons brought forward by various indi- 
viduals and public bodies throughout the country in favor of 
a government system of telegraph communications are not suf- 
ficient to warrant an immediate execution of the plan. 

22. The Swiss Federal Railways: by A. N. Holcombe/— 

The results of the first decade of federal ownership of railways in 
Switzerland are stated by Professor A. N. Holcombe as follows : 

"In Switzerland, where the government has sought to please 
all the people by lowering rates, increasing facilities, and raising 
wages, the railways which were doing well under corporate 
management show a deficit after ten years of governmental ad- 
ministration" ; and "have become a drain upon the taxpayers." 
So writes Mr. Logan G. McPherson in his recent book on 
"Transportation in Europe," pp. 172, 200. Mr. Carl S. Vrooman, 
on the other hand, in his equally recent book on "American 
Railway Problems in the Light of European Experience," p. 166, 
declares that "during the short period of eight years of actual 
government management considerable real and substantial 
progress has been made. Rates have been lowered, wages 
raised, hours of labor shortened, the service improved, and at the 
end of sixty years or thereabouts the people will be the pro- 
prietors of their railways, which actually will have paid for them- 
selves out of profits." The conclusions reached by these two 
1 Reprinted from the Quarterly Journal of Economics^ Vol. XXVI, pp. 342-362. 



REVENUES FROM PUBLIC INDUSTRIES 129 

writers are noteworthy. Both are trained investigators, and 
both are conscious of their responsibility to the public for the 
reliability of their facts and the reasonableness of their con- 
clusions. In the face of such a clash of opinion an independent 
examination of the evidence seems in order.^ 

The law for the repurchase of the steam railways of Switzer- 
land by the federal government was passed by the Federal As- 
sembly Oct. 15, 1897, and accepted by the people Feb. 20, 1898, 
by a vote of more than two to one (386,634 to 182,718). There 
were then five main lines of steam railway in Switzerland, the 
Central, the North-Eastern, the United Swiss, the Jura-Simplon, 
and the St. Gothard. The negotiations for the completion of the 
purchases were protracted by the refusal of the companies to 
accept the terms originally offered by the federal .government. 
The dispute was carried into the courts, and finally determined 
by two decisions of the Federal Court, Jan. 18-21, 1899, and 
July 18-19, 1899. The next two years were devoted to con- 
cluding the arrangements with the companies, and to perfecting 
the organization of the federal railway administration. The 
Generaldirektion of the federal railways met for the first time 
on July I, 1901, when it took over the duties of the board of 
directors of the Central railway. It assumed the active manage- 
ment of the Central and North-Eastern lines on Jan. i, 1902, of 
the United Swiss on July i, of the same year, of the Jura-Simplon 
on May i, 1903, and of the St. Gothard on May i, 1909. The 
beginning of Swiss federal railway management may therefore 
be dated from July i, 1901, although the government was not in 
a position to put its policies into general effect until two years 
later.2 

1 Public documents relating to the Swiss Federal railways are : 

1. Bericht des eidgenossischen Eisenbahndepartements iiber seine Geschafts- 
fiihrung im Jahre (annual). 

2. Bericht und Antrag des Verwaltungsrates der schweizerischen Bundesbahnen 
an den schweizerischen Bundesrat betreffend das Budget der schweizerischen 
Bundesbahnen fiir , zu Handen der Bundesversammlung (annual). 

3. Bericht der Generaldirektion der schweizerischen Bundesbahnen iiber die 

Geschaftsfiihrung und die Rechnungen des Jahres an den schweizerischen 

Bundesrat zu Handen der Bundesversammlung (annual). 

4. Statistische Tabellen. Beilage zum Bericht der Generaldirektion (annual). 

5. Rechnungen fiir das Jahr (annual). 

2 The best accounts of the events leading up to repurchase, of the popular 
discussion of the proposal to repurchase, and of the negotiations with the 



130 SELECTED READINGS IN PUBLIC FINANCE 

From the beginning the Swiss experiment in government 
ownership and operation of railways has interested the students 
of the railway problem. The early discussions of the nationali- 
zation of the Swiss railways shed little light, however, on the 
general issue of public ownership. Writers on the subject could 
do little more than speculate upon the success or failure of the 
federal railways, or narrate the events comprising the process of 
nationalization with varying sympathies according to their re- 
spective temperaments.^ As the first decade of the Swiss federal 
railways approaches completion, the evidence bearing upon the 
record of governmental management becomes more instructive. 

Probably the fairest procedure for determining the measure 
of success obtained by the Swiss government in the railway 
business is to ascertain first what it aimed to accomplish. The 
arguments advanced by the Federal Council in advocacy of 
public ownership were as follows :^ (i) The desirability of con- 
solidating the independent railway lines of Switzerland in order 
(a) to save the expenses of the superfluous company and general 
managers' offices, (b) to secure the advantages of monopoly and 
organization on a larger scale in equipment and maintenance of 
way, and in operation and the security of traffic, and (c) to im- 
prove the local service by the more generous employment of 
the profits on the profitable portions of the business for the 
extension of the service into less profitable places. (2) The re- 
duction of fixed charges by the substitution of the credit of the 
government for that of the private companies. (3) The appli- 
cation of net profits to the amortization of capital until the 



companies and the inauguration of governmental management, respectively, are : 
G. Keller, Der Staatsbahngedanke bei den verschiedenen Volkern, Bern, 1897 ; 
H. Micheli, Le Rachat des chemins de fer en Suisse, Cirailaire dii Mtcsee social, 
No. 18, le 25 mai, 1898 (translated by J. Cummings and published in American 
Economic Association Studies, Vol. Ill (1898), pp. 349-420) ; and P. Weissenbach, 
Die Durchfiihrung der Verstaatlichung in der Schweiz, Archivfur Eisenbahftwesen, 
Vol. XXVII (1904), pp. 1259-1327, and Vol. XXVIII (1905), pp. 105-156. 

1 Cf., for example, Henri Haguet, Le Rachat des chemins de fer suisses et ses 
consequences, Paris, 1902 ; and Edgard Milhaud, Le Rachat des chemins de fer, 
Paris, 1904. 

"^ Botschaft des Bundesrates an die Bundesversammlung betreffend den Riick- 
kauf der Eisenbahnen vom 25. Marz, 1897. This message constituted the platform 
and campaign handbook of the advocates of public ownership prior to the refer- 
endum election in February, 1898. 



REVENUES FROM PUBLIC INDUSTRIES 131 

entire railway system should be owned clear of debt, thus 
eventually making possible a great reduction of rates (France, 
Germany, and Austria, it was believed, would be in a similar 
position by the middle of the twentieth century). (4) The 
abolition of discriminations of all kinds, and the establishment of 
uniform and just rates (the message intimated that the lowest 
rates for each class of traffic then in force on any private road 
would be extended to all the roads to be acquired by the federal 
government). (5) The more effective representation of the in- 
terests of shippers and of the traveling public as opposed to the 
interests of stockholders in railway management. (6) The im- 
provement of the conditions of employment of the employees 
(a) by standardizing the various wage scales and labor regula- 
tions (the Federal Council intimated that the highest wage scales 
in force on any of the roads to be acquired would be extended 
to all the roads to be acquired), (b) by better enforcement of 
federal labor legislation than was possible while the lines were 
under private management, and (c) by maintaining the superan- 
nuation and other benefit funds on a sound and liberal basis. 
(7) The elimination of foreign influence from the management 
of Swiss railways (apparently in at least three of the leading 
roads foreign stockholders then held a controlling interest, and 
such control, in the opinion of the Federal Council, was politically 
dangerous). 

The message of the Federal Council was tinged with a strain 
of sentiment. There was some appeal to the national pride, 
which ought to insist upon the popular management of those 
affairs which are of prime importance to the safety and well- 
being of the commonwealth, and to the national prejudice, which 
ought not to tolerate the threatened control of Swiss domestic 
commerce by aliens. But in the main the Federal Council founded 
its case upon sober calculations of lower rates and additional 
facilities for shippers and traveling public, of improved con- 
ditions for railway employees, and of better management gen- 
erally. The arguments of the Federal Council were tersely 
summed up by a sympathetic American writer.^ "The national- 
ization of the Swiss railroads," he writes, "was inevitable, a 
natural fruit of the spirit of democracy"; but the "direct 
efficient cause" was "business opportunism." 

1 H. D. Lloyd, A Sovereign People, p. 171. 



132 SELECTED READINGS IN PUBLIC FINANCE 

Let us now consider the results of this policy of "business op- 
portunism." In the first place, the political dangers of the alien 
control of Swiss domestic transportation, whatever they may 
have been, were definitively removed. So much nationalization 
accomplished. Much of the purchase money, to be sure, was 
borrowed abroad on the credit of the government, but foreign 
bondholders and foreign stockholders are not of the same genus. 
The Swiss people by the nationalization of their railways not 
only assumed the responsibility but obtained the power to 
manage them in the interests of Swiss shippers, travelers, and 
railway workers. After nationalization, there could be no danger 
of the exploitation of the Swiss people as a whole. The only 
possible danger would be that of the exploitation of one class 
of people by another. The general public in its political capacity 
might exploit the railway workers by denying them just com- 
pensation and conditions of employment ; conversely, the railway 
workers, by gaining an improper influence over the government 
of the day, might exploit the general public by obtaining ex- 
cessive wages at the cost of reasonable rates of transportation. 
In fact the relations between the state employer and the railway 
workers have been singularly harmonious and free from friction. 
The workers have never struck, nor even threatened to strike. 
The government, on the other hand, has always maintained its 
authority, and, while treating its employees with liberality, 
has never given them more than could be publicly shown to 
be their due. 

The conditions of employment on the federal railways were 
regulated by the laws of June 29, 1900, and Dec. 19, 1902. The 
various grades of employees were classified, and maximum and 
minimum rates of pay were prescribed for each class. The high- 
est rates paid on any of the private roads were adopted as the 
minimum rates for the corresponding classes of the federal serv- 
ice. The new rates went into effect May i, 1903, and each third 
year thereafter the pay of every employee who had served 
through the preceding three years was to be increased by three 
hundred francs until the maximum for the class should be 
reached. An eleven-hour day was established (which is less than 
the usual Continental European working-day), with the further 
provision that every train-crew should have at least ten hours 
of unbroken rest in each twenty-four, and all other employees at 



I 



REVENUES FROM PUBLIC INDUSTRIES 133 

least nine hours. More liberal provision than had previously 
been the rule was made for a weekly day of rest and for annual 
vacations. The common laborers shared in the improved con- 
ditions of employment, but the most highly paid administrative 
officers suffered, since in view of the salaries paid to other officers 
in the service of the federal government, it was not possible to 
continue the fancy salaries sometimes paid by the private com- 
panies to favored officials. These changes, the improved condi- 
tions of employment even more than the higher wages, tended to 
increase the operating expenses of the federal railways ; but they 
had been practically promised in advance, and their probable cost 
had been reckoned with by the advocates of nationalization.^ 

The labor policy of the Swiss railway management is revealed 
by the conduct of the employees when the pressure of the recent 
increase in the cost of living began to be felt. The standard wage 
scale was established upon the basis of the general level of prices 
and wages in 1899. Since then the rise in the general level of 
prices has been world-wide. According to Calwer's index num- 
ber, which most adequately portrays the monetary situation in 
Switzerland, the rise in the cost of living from 1899 to 1907 
amounted to 17^ per cent. The highest rates of wages in effect 
upon the private railways (which were the basis of the govern- 
mental rates) had been established in 1896 and the rise in the 
cost of living since then amounted to over 2J per cent. The men 
began to complain, respectfully, but during 1906 with increasing 
vigor. The government, when confronted by the men with 
family budgets and other pertinent evidence of the fall in real 
wages, recognized the justice of their claims, but wished to post- 
pone the revision of their Avages until a general act could be pre- 
pared that would apply to all federal employees. In December, 
1906, the Union of Postal, Telegraph, and Customs Officials, the 
Union of Swiss Transportation Laborers, and the Union of Swiss 
Transportation Officials simultaneously petitioned the Federal 
Assembly for a special supplement to their regular wage during 
the year sufficient to compensate them for the increase in the cost 
of living. The Federal Council ultimately recommended that 
each married employee and each unmarried employee with per- 
sons dependent upon him for support, earning less than 4000 

^ Cf. Botschaft des Bundesrates an die Bundesversammlung betreffend die 
-Arbeitsverhaltnisse der Bundesbahnen vom i. December, 1899. 



134 SELECTED READINGS IN PUBLIC FINANCE 

francs a year, should receive a supplement to his annual earnings 
of 100 francs; and that all other employees earning less than 
4000 francs should receive 50 francs. The Federal Council took 
pains in its message to the Assembly to remark on the courteous 
tone of the employees' petitions and the reasonableness of their 
request.^ The payment of this "high-prices-increment" was 
repeated in 1907 and 1908. In 1909 the scope of the extra pay- 
ment was extended, and finally a law of June 23, 1910, revised 
the classification of railway employees and established a general 
and permanent increase of wages.^ 

This incident in itself is not perhaps of great importance, but 
it illustrates the good understanding that prevails between the 
railway management and its employees. The influence which 
the latter exert in order to bring about an improvement of their 
conditions of employment has no unhealthy effect upon Swiss 
politics. It is not so strong as to subordinate the good of the 
service to their private advantage, and yet strong enough to 
secure the prompt recognition of their just claims. Nor has 
governmental management brought with it an extravagant over- 
manning of the roads. The rate of increase in the number of 
employees on the federal railways up to the end of 1908 was less 
than the increase during the same period on the St. Gothard, 
which remained under private management until the following 
year, although the rate of development of traffic was greater on 
the federal lines than on the St. Gothard. The total number of 
employees at the end of 1909 was 34,575, and there is absolutely 
no evidence of "politics" in the management. Suitable pro- 
vision is made for insurance against sickness and accident, pen- 
sions are provided in the event of chronic infirmity or old age, 
and the organization of labor is provided for by the manage- 
ment itself. Thus public ownership has brought with it the 
adoption of methods that recognize the mutuality and solidarity 
of labor, and convert the craving for combination and mutual 
support, so characteristic of modern wage-earners, into a pro- 
ductive asset. 

1 Botschaft des Bundesrates an die Bundesversammlung betreffend die Bewilli- 
gung eines Spezialkredites behufs Ausrichtung von Teuerungszulagen fUr das 
Jahr 1906 an die eidg. Beamten und Angestellten vom 2. April, 1907. 

2 Botschaft des Bundesrates an die Bundesversammlung betreffend die Besoldung 
der Beamten und Angestellten der schweiz. Bundesbahnen vom 25. October, 1909. 



REVENUES FROM PUBLIC INDUSTRIES 1 35 

The management of the Swiss federal railways was organized 
expressly with a view to enabUng representatives of Swiss ship- 
pers and the traveling public to participate in the conduct of 
affairs. The plan of this organization was worked out in 
advance of nationalization, and set forth in the message of 
the Federal Council of March 25, 1897.^ The popularity of 
the plan was undoubtedly one of the leading factors in the 
victory of the policy of public ownership. It was desired that 
the administrative organization should be made independent 
of political influence and yet that it should be so closely con- 
nected with the government that there would be no danger 
of its becoming a state within a state, a body that might come 
into conflict with the government itself. Hence the adminis- 
tration of the federal railways forms a separate division of 
the federal administration, and the finances of the railways 
are entirely disconnected from the finances of the Confederacy. 
The supreme railway authority is the Federal Assembly, which 
has cognizance of the following matters : the ratification of 
plans for the construction and acquisition of new railways, 
and of loan operations and plans of amortization; the sanc- 
tioning of the classification of employees and of the fixing of 
schedules of wages ; and the approval of the annual budgets, 
and of the annual accounts and reports of operations. The gen- 
eral control of the management is entrusted to the Federal Coun- 
cil, which prepares all business requiring definitive action on the 
part of the Federal Assembly, executes the policies of the As- 
sembly and appoints the members of the Generaldirektion, and 
of the district directories, and the government members of the 
federal administrative council, and of the district administrative 
councils. -The general directory has charge of the employees and 
the actual operation, and prepares plans and reports for submis- 
sion to the administrative council. The administrative council 
scrutinizes the accounts, examines the annual statements and 
approves the draft of the railway budget. It has charge of the 
freight and passenger tariffs and classifications, approves the 
general plan of train schedules, adjusts the relations with other 

1 The law of Oct. 15, 1897, regulating the organization of the administration of 
the Swiss federal railways, is translated and reprinted in full in Vrooman, American 
Railway Problems, Appendix 4. See also W. Exner, Studien iiber die Verwaltung 
des Eisenbahnwesens mitteleuropaischer Staaten (Vienna, 1906), pp. 43-61. 



136 SELECTED READINGS IN PUBLIC FINANCE 

lines, regulates competitive traffic and renders final decision in 
regard to construction and additions, both of plant and of equip- 
ment. Under these are the district directories and administrative 
councils for the five districts into which the federal railways are 
divided. 

The feature in the plan of organization to which it has owed 
much of its popularity among shippers and the general public 
is the administrative council. This is composed of fifty-five mem- 
bers, twenty-five of whom are chosen by the Federal Council, a 
like number by the cantons and half-cantons, and five by the 
district councils. The latter in practice are usually the presidents 
of the five district councils. The others are chosen with due 
regard to the interests of agriculture, industry, and commerce, 
respectively, for terms of three years. The Federal Council pro- 
ceeds to the election of its quota only after the cantonal and 
district council elections have been made, and not more than 
nine of the twenty-five federal appointees may be members of 
either branch of the Federal Assembly. The district councils 
consist of fifteen to twenty members, four of whom are chosen 
by the Federal Council, and the others by the cantons within 
the district, with due regard to the representation of the various 
economic interests. The members receive annual passes and a 
per diem for their actual time devoted to the public service. 
This system of councils was probably suggested by the analogous 
railway councils, created by von Maybach for the Prussian state 
railways, which have worked so well in Germany.^ The district 
councils meet quarterly, the administrative council monthly. 
The record of business transacted by the councils is published 
every year. Thus thorough publicity is combined with the rep- 
resentation of the interests of shippers and the public in such a 
way as to lead the patrons of the railways to feel that those who 
pay the rates have a share in the responsibility for their making, 
and that those who use the railway facilities have a voice 
in their creation. Neither fiscal exploitation on the part of the 
federal government, nor personal or local discrimination in favor 
of privileged interests, can well occur under such a system of 
management. The security for reasonable rates, in the sense of 
rates calculated to promote public rather than private interests, 

1 Cy] A. N. Holcombe, Public Ownership of Telephones on the Continent of 
Europe, ch. 3. 



REVENUES FROM PUBLIC INDUSTRIES 137 

seems better than under any possible system of private manage- 
ment. At any rate this mode of onganization has given uninter- 
rupted satisfaction to the Swiss people. 

As soon as the government had gained control of a sufficient 
number of lines it proceeded to fulfill its pledges with regard to 
rates.^ The principles of the revision of rates were laid down in 
a message of the Federal Council to the Federal Assembly of 
Nov. 17, 1899. The fundamental principles of the revision were 
the standardization of the various schedules in effect on the 
private roads, full publicity of rates, ample notice of changes, and 
the cooperation of shippers and railway management in the mak- 
ing of rates. With the latter object in view, the federal railway 
department sent out copies of the preliminary draft of the re- 
vised schedules to the various shippers' associations, — the Swiss 
Handels- und Industrieverein, the Swiss Gewerbeverein, the Swiss 
Bauernverbandj and the Swiss Eisenbahnverband. All these as- 
sociations cordially responded to the railway department's in- 
vitation to hand in their criticisms of the proposed schedules. 
The schedules were finally considered by the Federal Assembly, 
and enacted to go into effect May i, 1903, on the four main lines 
then in the hands of the government. The law provided an 
elastic process of rate making for service in the future. Increases 
or cancellations of rates require three months' advance notice, 
but the period may be shortened, if material reductions accom- 
pany increases of rates, or if international through rates are 
increased on the external portion of the route only. Reductions 
of passenger rates must remain in effect at least three months, 
and of freight rates at least one year, but reductions may be 
granted for shorter periods if the period is stipulated in advance. 
These restrictions do not apply to excursion rates. Thus the 
pubHc enjoys complete security against unfair discrimination 
(for there have never been any charges of secret rebating or 
criminal collusion between railway officials and favored shippers) 
without unduly restricting the power of the federal railways to 
adapt their charges to special conditions. 

The government has retained the system of three classes of 

passenger service. The third class, however, and under certain 

circumstances even the second, may be omitted from express 

trains, and the first class, and under certain circumstances even 

1 Law of June 27, 1901. 



13S SELECTED READINGS IN PUBLIC FINANCE 

the second, may be omitted from accommodation trains. In fact, 
these omissions are freely made, and the Swiss three-class sys- 
tem works out in much the same way as the American system of 
Pullman and tourist cars, and day coaches. The schedule of 
passenger rates adopted for the federal lines was the lowest in 
effect at the period of repurchase on any of the private lines. 
The railway traffic and general economic conditions are so dif- 
ferent in Switzerland and in the LTnited States that a comparison 
of passenger rates is fruitless, and the same statement is true of 
freight rates. The classification of freight is relatively simple. 
Provision is made for the special classification of raw materials 
used in agriculture, and of some other commodities. Special 
rates may be made out of consideration for foreign competition, 
in order to secure equally favorable treatment for domestic ship- 
pers on foreign railways, and to secure transit traffic from com- 
peting lines, provided that domestic shippers are not injured 
thereby. In times of public distress the Federal Council may 
make special rates on foodstuffs and live stock. The various 
freight-rate tariffs charged by the private companies were not 
withdrawn until the new standard rates could be properly ad- 
justed, and it was not until July i, 1904, that the new rates were 
put into effect. Thus the pledges of the Federal Council relating 
to rates, contained in the message of 1897, advocating public 
ownership, were carried out to the letter, and in view of all the 
circumstances the period that elapsed was not unduly prolonged. 
The law of July 27, 1901, not only established a satisfactory 
system of rate making, but also provided for the redemption of 
the pledges for improved service. The number and speed of 
trains and the supply of rolling-stock has been increased, ter- 
minal facilities have been improved, and ways more solidly 
maintained. The reports of the chambers of commerce of Swiss 
cities and of other bodies authorized to speak in the name of the 
economic interests of the . country are full enough of specific 
criticisms of the service and suggestions for its improvement, 
but there is no disposition to disparage the capacity of the rail- 
way administration or to condemn its conduct of affairs. There 
has never been any dispute among the critics of the Swiss fed- 
eral railways over the adequacy and efficiency of the service, 
nor is there any between the two writers mentioned at the be- 
ginning of this article. Mr. Vrooman states that "rates have 



REVENUES FROM PUBLIC INDUSTRIES 139 

been lowered, wages raised, hours of labor shortened, the service 
improved," and Mr. McPherson does not contradict this state- 
ment. The difference of opinion is as to who is paying the bills. 
One writer says tlie railways are more than paying their way ; 
the other, that they are a drain on the taxpayers. The un- 
settled question in the matter of the Swiss federal railways is 
that of their financial standing. 

The popular majority which sanctioned the program of public 
ownership in 1898 had not expected to make of the federal rail- 
ways a fiscal monopoly. The earning of a large revenue for 
the government was not among the advantages of nationalization 
urged by the Federal Council in its message of 1897. The latter 
had declared, on the contrary, in favor of the application of net 
earnings to the amortization of the railway loans. The Swiss 
regarded the funded debt in the light of a mortgage upon their 
railway property, and determined to own their property clear of 
such charges before diverting net earnings to the federal treas- 
ury. The Federal Council's purpose in advocating the ultimate 
extinction of interest charges was to facilitate an eventual reduc- 
tion of rates rather than to secure a fresh source of public 
revenue. The period of sixty years was selected as that in which 
the funded debt should be amortized. The annual payments 
necessary to effect such amortization were accordingly computed, 
and are made a fixed charge in each annual railway budget. 
The policy of the railway management was understood from the 
beginning to be to earn no more profit than should be necessary 
to meet these amortization charges, remitting surplus earnings 
to the public in the form of better service or lower rates rather 
than in that of cash contributions to the federal treasury. There 
has not yet been any connection between the railway profit and 
loss account and the general federal revenues. 

The item of net earnings in a federal railway statement is 
accordingly not comparable with a similar item or with anything 
in an American railway statement. It actually represents the 
surplus profits over and above the interest charges (averaging 
about 3^ per cent) on the entire funded debt and the amorti- 
zation charges on the same. The latter, which in substance are 
a kind of deferred profit, and would ordinarily be classified under 
the head of profits, amounted to 4.3 million francs in 1903, and 
were estimated at slightly over 8 millions in the budget for igii. 



I40 SELECTED READINGS IN PUBLIC FINANCE 

The sum of interest and amortization charges represents not 
much over 4 per cent upon the funded debt, and is much less 
than the interest and dividend charges upon any profitable 
American road. In other words, the cost of the capital devoted 
to the use of the shipping and traveling public by the Swiss 
government is materially less than the cost of the capital devoted 
to the use of the American public by American railways. Other 
things being equal, the cost of service on the Swiss railways 
must be less than if private enterprise were employed to render 
the same service. Hence it would appear not impossible that the 
Swiss government might reduce rates, raise wages, shorten the 
hours of labor, and improve the service, as it has done, and still 
make both ends meet. Under the peculiar Swiss conditions, then, 
the test of financial success is the proximity of the profit and 
loss item in the accounts to zero. 

There has been a wide-spread impression in recent years, both 
in Switzerland and elsewhere, that the federal railways have 
proved a financial failure.^ This impression is founded largely 
upon the annual official budgets. Each year since the revised 
rates of wages and passenger and freight tariffs were put into 
effect, the railway management itself has estimated that the next 
year would close with a deficit. Thus in a sense it is true that the 
federal railways year after year have been having to face deficits. 
These deficits, however, have been more apparent than real. 
The actual financial results have regularly been more favorable 
than the budgetary estimates with the single exception of the 
year 1908, and the federal railways have regularly earned a 
surplus over and above the amounts required for the interest and 
amortization charges except in the two years 1908 and 1909. 
This is indicated by the table on the next page, computed from 
the official reports, showing in parallel columns the estimated 
deficits and the actual results. 

Some of these figures are not the same as the corresponding 
figures in the official budgets and reports. The official budgets 
do not include with the regular estimates for the year any esti- 
mate of the so-called "high-prices-increments" paid since 1^06 
to the railway employees. Beginning with 1907, I have included 
such an estimate, based on the sum actually so paid in the 

1 Cf. P. Favarger, La Situation des chemins de fer federaux en Suisse, Journal 
des Economistes, Decembre, 19 10. 



REVENUES FROM PUBLIC INDUSTRIES 



41 



Year 


Profit (+) or Loss (-) 


Profit (+) or Loss (— ) 




AS ESTIMATED IN BUDGET 


Actually resulting 


1902 




+ 4,422,420 


1903 





+ 1,030,682 


1904 


- 1,209,725 


+ 60,735 


1905 


— 2,088,400 


+ 651,734 


1906 


— 4,660,350 


+ 2,548,523 


1907 


- 2,528,527 


+ 429,812 


1908 


- 2,498,790 


-5,823,166 


1909 


-10,927,330 


— 4,091,020 


191O 


- 9,125,000 


+ 7,948,758 



preceding year. The official reports often carry over surpluses or 
deficits into the accounts of the ensuing year, where they serve 
to conceal the true result of that year's operations. Thus the 
report for 1910 states the result of the year's operations to be a 
deficit of 1,535,616 francs, whereas in fact the result was to 
diminish the accumulated deficits of the two preceding years by 
the amount shown in the table ; that is, the largest surplus in the 
history of the federal railways. Taking the results of the entire 
operations up to the end of the decade, the surpluses exceed the 
deficits. Since, however, a portion of the earlier surpluses were 
employed for extraordinary amortizations, the official balance 
sheet at the end of 1910 showed a net deficit of one and a half 
million francs on the eight -years' operations, or a little more 
than one-tenth of i per cent of the present funded debt of the 
federal railways. The amortization charges for a single year, 
which are a species of profit, would wipe out this deficit several 
times over. Since all interest and amortization charges have 
regularly been paid, this nominal deficit may be disregarded. 
Indeed, it should have been wiped out by the results of the first 
quarter's operations in 191 1. So near an approach to the ideal 
zero of surplus profits must be considered a sufficient disproof 
of the charge of financial failure. 

The important concern is whether this state of equilibrium 
between income and outgo is likely to be permanent. We must 
therefore inquire into the causes of the series of unfavorable 
budgets prepared by the railway management and of the two 
deficits actually incurred. 

The reduction of rates, improvement of service, and increase 



142 SELECTED READINGS IN PUBLIC FINANCE 

of wages, as pledged by the Federal Council in its message of 
1897, had for their immediate effect, as had been anticipated, a 
more rapid increase of operating expenses than of traffic re- 
ceipts. But the advocates of nationalization had contended that 
this increase would be met out of savings in other directions, 
especially in the lowering of the cost of capital and in the more 
economical management of the railways as a consolidated monop- 
olistic system. Hence, unless the advocates of the policy of 
'"'business opportunism" were mistaken in their calculations, the 
causes of the unfavorable budgets must lie elsewhere. 

The explanation seems to be simply that the Federal Council 
had calculated very closely, when it outlined the advantages of 
nationalization, and abnormal economic conditions could easily 
disturb the balance of income and outgo. In 1902-03, when 
the transfer of the four leading private lines was made, Europe 
generally was suffering from an acute commercial depression. 
The receipts had already shown a tendency to fall off before the 
transfers were made. The new governmental management found 
that the private systems had been allowed to run down during 
the preceding period of uncertainty more than had been antici- 
pated. Maintenance and renewal requirements were accordingly 
abnormally heavy, and the immediate outlook for an increase 
of traffic, despite the promised reduction of rates, was not bright. 
Hence the unfavorable budgetary estimates for the years 1904-06. 
The commercial depression, however, proved to be only tem- 
porary ; traffic, both passenger and freight, increased with un- 
expected rapidity ; and in 1906 an anticipated deficit of nearly 
five million francs was converted into a surplus of over two and 
one-half millions. The effect was to stimulate an accelerated 
increase of expenditures. This is reflected in the budgetary esti- 
rhates of new construction and equipment to be charged tO' capi- 
tal account, as well as in the account of operating expenses. 
The railway management understood the situation perfectly. 
Writing in 1906, they stated that "thanks to the development of 
the passenger and freight traffic, we may hope that in 1906 as 
in the preceding year operations will be concluded without a 
deficit, contrary to the anticipations of our budget. If the 
development of the traffic continues and our anticipations of 
increased receipts are accordingly realized, the same result will 
occur in 1907. But it ought not to be overlooked that the con- 



REVENUES FROM PUBLIC INDUSTRIES 143 

tinual increase of expenditures cannot be further held in check, 
so that any business depression will inevitably upset the balance 
of our accounts."^ 

The unwelcome business depression came at the end of the 
following year, the year of the American panic. The operating 
receipts of the Swiss federal railways were Jess in 1908 than in 
1907, although expenditures were materially greater. The situa- 
tion was made more acute by the grant of the "high-prices- 
increments" to the employees. In fact, not only the cost of 
labor, but that of many other railway supplies had gone up ap- 
proximately 25 per cent in the last ten years. The St. Gothard, 
the only important Swiss railway at that time still under private 
management, suffered as severely as did the federal railways. 
The federal railway management cut down expenses in every 
legitimate way, suppressing superfluous trains, and reducing its 
working force as much as possible without impairing the effi- 
ciency of the service. Yet the policy begun in 1906 of voluntarily 
adding a supplement to the wages of all employees, in order to 
enable them to maintain a reasonable standard of comfort in the 
face of an ever-increasing cost of Hying, was courageously 
maintained. Had these payments been discontinued, the federal 
railways might have passed through the crisis without any defi- 
cit, but such a backward step was not suggested. The man- 
agement was told by its critics that it could not restore the 
equilibrium of its budget without a radical increase of rates, but 
no such increase was- sanctioned. The management adhered 
to its policy of retrenchment, and relied upon the return of 
prosperity to revive the surplus. 

The vigor of the policy of retrenchment is revealed in the 
budgetary estimates of capital expenditures for fresh construc- 
tion during this period. These amounted to 39.7 millions of 
francs for 1906, to 42.6 millions for 1907, to 49.5 for 1908, 
34.6 for 1909, 31. 1 for 1910, and 30.7 for 191 1. The operating 
ratio, which was 61. i per cent in 1902 and 65.5 per cent in 
1903, had risen to 72.8 per cent in 1908. It was reduced by 1910 
to the same figure as in 1903. In the official report for 1910 
(p. 56) the management was able to point to the complete suc- 
cess of its financial policy. The second decade of the Swiss 
federal railways begins auspiciously with an estimated surplus, 
1 Bericht und Antrag vom 28. September, 1906, p. 51. 



144 SELECTED READINGS IN PUBLIC FINANCE 

the first budgetary surplus since the government's railway policies 
have been in effect.^ The truth is that the Swiss federal railway 
management is to be highly commended for its energetic and sa- 
gacious handling of a difficult situation. In any undertaking in 
which the margin of profit is calculated so closely as in the Swiss 
federal railways, abnormal conditions may temporarily produce 
abnormal profits or losses ; but over longer periods of time these 
should offset one another. There is no reason why the equi- 
librium between income and outgo should not be permanent. 

Our examination of the financial history of the Swiss federal 
railways leads us to certain definite conclusions. Mr. McPher- 
son's statement that the railways have become a drain upon the 
taxpayers is not supported by the evidence. For Mr. Vrooman's 
prediction, on the other hand, that the existing railways will 
have paid for themselves out of profits in about sixty years, 
there is substantial foundation in the record of governmental 
management. Without venturing, however, to predict, we may ob- 
serve that the Swiss federal railways have already reduced rates, 
improved the service, raised wages, and made a profit. In short, 
the evidence of the first decade of the Swiss federal railways is 
that the policy of "business opportunism" is justifying itself. 

23. Municipal Industries. — The extension of the "industrial 
domain" of governments has been very marked, in recent 
years, in the field of municipal industries. The necessity for 
increased public control of local monopolies was recognized by 
John Stuart Mill in his discussion of the cases in which it is 
possible to justify a departure from the policy of laissez-faire. 
Concerning private corporations or associations engaged in 
such monopolistic enterprises, Mill wTote:^ 

But although, for these reasons, most things which are 
likely to be even tolerably done by voluntary associations 
should, generally speaking, be left to them, it does not follow 
that the manner in which those associations perform their work 
should be entirely uncontrolled by the government. There are 
many cases in which the agency, of whatever nature, by which 
a service is performed, is certain, from the nature of the case, 

1 Bericht und Antrag fiir 191 1, p. 48. Ibid, fiir 191 2, p. 50. 

2 Principles of Political Economy, Bk. V, ch. 11, § 11. 



REVENUES FROM PUBLIC INDUSTRIES 145 

to be virtually single ; in which a practical monopoly, with all 
the power it confers of taxing the community, cannot be pre- 
vented from existing. I have already more than once adverted 
to the case of the gas and water companies, among which, 
though perfect freedom is allowed to competition, none really 
takes place, and practically they are found to be even more 
irresponsible, and unapproachable by individual complaints, 
than the government. There are the expenses without the 
advantages of plurality of agency ; and the charge made for 
services which cannot be dispensed with is, in substance, quite 
as much compulsory taxation as if imposed by law ; there are 
few householders who make any distinction between their 
" water rate " and their other local taxes. In the case of these 
particular services, the reasons preponderate in favor of their 
being performed, like the paving and cleansing of the streets, 
not certainly by the general government of the state, but by the 
municipal authorities of the town, and the expense defrayed, as 
even now it in fact is, by a local rate. 

The characteristics of these monopolistic enterprises, now 
generally called natural monopolies, were further elucidated by 
T. H. Farrer nearly a generation after Mill wrote. Farrer's 
discussion has had much influence upon American writers, and 
was, in part, as follows : ^ 

Is there, then, any general characteristic by which these un- 
dertakings, or others of a similar kind, may be recognized and 
distinguished from undertakings which are governed by the 
ordinary law of competition. 

It is not large capital, for though most of them require large 
capital, some gas and water companies, which are complete 
monopolies, have capitals of not more than two or three thou- 
sand pounds ; whilst other enterprises with enormous capitals, 
e.g. banks, insurance offices, shipping companies, are not 
monopolies. 

It is not positive law, for few of them have a monopoly 
expressly granted or confirmed by law ; and in most, if not all, 

1 The State in its Relation to Trade, 69-71 (London, 1883). 



146 SELECTED READINGS IN PUBLIC FINANCE 

of the cases where such a monopoly happens to have been so 
granted or confirmed, it would have existed without such grant 
or confirmation. 

They all agree in supplying necessaries. But this alone is no 
test, for butchers and bakers supply necessaries. 

Most, if not all, of them have exclusive possession or occupation 
of certain peculiarly favorable portions of land — e.g. docks, of 
the riverside, gas and water companies, of the streets. But this 
is only true in a limited sense of such undertakings as the post 
office, telegraphs, or even of roads and railways ; and a mine, a 
quarry, or a fishery has equally possession of specially favored 
sites without generally or necessarily becoming a monopoly. 

The article or convenience supplied by them is local, and can- 
not be dissevered from the possessor or user of the land or 
premises occupied by the undertaking. The undertaking does 
not produce an article to be carried away and sold in a distant 
market, but a convenience in the use of the undertaking itself, 
as in the case of harbors, roads, railways, post office, and tele- 
graphs ; or an article sold and used on the spot where it is 
produced, as in the case of gas and water. 

Again, in most of these cases the convenience afforded or 
article produced is one which can be increased almost indefi^titely^ 
without proportionate increase of the original plant ; so that to 
set up a rival scheme is an extravagant waste of capital. 

There is also in some of these undertakings, and notoriously 
in the cases of the post office, of telegraphs, and of railways, 
another consideration, viz. the paramount importance of certainty 
and harmonious an^angement. In the case of most industries — 
e.g. in that of a baker — it would be easier to know what to do 
if. there were one instead of several to choose from ; but this 
consideration is in such a case not paramount to considerations 
of cheapness. In the case of the post office and telegraphs, 
certainty and harmony are the paramount considerations. The 
inconvenience would be extreme if we had to consider and 
choose the mode of conveyance every time a letter is dispatched, 
or if a telegram sent from any one station could not be dispatched 
to all other stations. 

The following, then, appear to be the characteristics of under- 
takings which tend to become monopolies: 



REVENUES FROM PUBLIC INDUSTRIES 147 

1. What they supply is a necessary. 

2. They occupy peculiarly favored spots or lines of land. 

3. The article or convenience they supply is used at the place 
where and in connection with the plant or machinery by which 
it is supplied. 

4. This article or convenience can in general be largely, if 
not indefinitely, increased without proportionate increase in plant 
and capital. 

5. Certainty and harmonious arrangement, which can only be 
attained by unity, are paramount considerations. 

24. The Policy of American Municipalities. — The proper 
policy for municipalities to pursue with respect to local mo- 
nopolies is now the subject of lively discussion both in the 
United States and England. From the large and growing 
literature dealing with the question ^ we shall have room for 
but a single selection, which summarizes in a judicial manner 
the situation in the United States : ^ 

Municipal ownership of public utilities in American cities, 
except so far as concerns the water supply, has only recently 
been recognized as a possibility, much less an issue. Its 
advocacy, indeed, was frowned upon as savoring strongly of 
socialistic propaganda. The supplying of water has always 
been considered a proper function of government. Munici- 
palities have also constructed and owned their sewers, and in 
some seacoast cities the docks are the property of the city. 
Into the purely industrial field of public activity, the sale of light, 
heat, and transportation, the building of model tenements, the 
ownership of telephones, and the many other industrial functions 
which European cities have so largely taken over, American 
municipalities have not, until recent years, attempted to enter. 

The reason for the close limitation of the functions of gov- 

1 The following references may be suggested : Major Leonard Darwin, Municipal 
Trade (New York and London, 1903) ; E. W. Bemis, editor, Municipal Monopo- 
lies (New York, 1899) ; Municipal Affairs, Vol. VI, No. 4 (1903). 

2 The Recent History of Municipal Ownership in the United States, by Charles 
Waldo Haskins. In Municipal Affairs, Vol. VI, pp. 524 et seq. (1903). Reprinted 
by permission of the Reform Club. 



148 SELECTED READINGS IN PUBLIC FINANCE 

ernment we are not called upon to discuss. Our present con- 
cern is with the evidences of a departure from the traditions 
of individualism and the development of a considerable body of 
influential opinion in favor of an extension of the field of city 
activity. Within the last five years a movement has developed 
in favor of the ownership of public utilities which promises 
to accomplish considerable results. It is the purpose of this 
paper to present some of the leading features of the movement. 

Extent of Municipalization 

At the close of 1902 the situation of municipal ownership was 
as follows : Out of 1475 water-supply systems reported for 
cities of 3000 and over, ^66^ or 51 per cent, were owned by 
municipalities, 33 were owned by both city and private com- 
pany, 661 were owned by private corporations, and 14 were 
owned jointly. In the larger cities of more than 30,000 inhabit- 
ants, out of 135 plants, '^Z were owned by the city. As the 
municipality decreases in size, the proportion of privately owned 
plants increases, being largest in towns of between 5000 and 
30,000 inhabitants. The percentage of water plants owned by 
the public is largest in the North Central states, and smallest 
in the South Central states. 

Public ownership of the water supply is an accompHshed fact, 
so firmly established and so familiar that it is not usual to argue 
from its existence to the desirability of extending the system to 
other public utilities. The supplying of water being so closely 
concerned with the public health, ranks in the public mind with 
the provision and maintenance of sewers, the cleaning of the 
streets, and the inspection of food and milk. 

When we turn to lighting and transportation, however, we 
see that the provision of water is a peculiar and unique fact 
which finds no parallel in other parts of the field of public ser- 
vice. Out of 981 municipalities which are reported as having gas 
works, only 20 cities own their gas plants. The five largest of 
these cities are Philadelphia, Louisville, Richmond (Va.), Duluth, 
and Wheeling (W. Va.). Excluding Louisville, where the 
city is only part owner of its gas works, only one large city, 
Philadelphia, is the owner of its gas plant, and in Philadelphia 



I 



REVENUES FROM PUBLIC INDUSTRIES 149 

the plant has been leased to a private company until 1927. 
Municipal ownership has made little progress in the field of gas 
lighting. 

Electric lighting is a more recent development than gas light- 
ing, and it is natural to expect that if the sentiment in favor of 
public ownership is growing, it would find expression in this 
field. This we find has been the fact. Out of 1471 cities of 
3000 reporting systems, 193 were owned outright by municipali- 
ties, 85 were owned by both city and private company, and 1190 
were owned by private companies. Few of the large cities, 
however, own their electric lighting plants. Out of 135 systems 
in cities of more than 30,000 population, 121 were owned by 
private companies, 10 were owned by both, and only 4 were 
owned outright by the cities in which they were located. The 
largest proportion of publicly owned plants is found in towns of 
from 3000 to 5000 inhabitants, where, out of 579 reported, in 
were owned by the municipality, and in 18 cities plants were 
owned both by the municipality and a private company. 

The largest percentages of publicly owned electric lighting 
plants were situated in the North Central and South Atlantic 
states, and a much smaller percentage in the New England and 
the Middle Atlantic states. It is to be noted, moreover, that 
Chicago and Detroit are the only cities of the first class owning 
lighting plants, and that, for most of the larger cities which 
manufacture electricity, public activity is restricted to the lighting 
of streets and public buildings, leaving the field of commercial 
lighting to the private company. 

It is when we examine the ownership of street railways, how- 
ever, the most difficult and costly of these public services to 
administer, that we see how small is the progress of the mu- 
nicipal ownership movement. Out of 928 companies reported 
in 1902, only one, in Grand Junction, Col., was owned by a 
municipality. 

To summarize the progress made, we find (i) that water- 
works are generally owned by municipalities, and that the pro- 
portion is increasing ; (2) that a few electric fighting plants in 
cities and a large number in smaller towns are publicly owned, 
but that while the number of public plants tends to increase, the 
proportion to private plants does not increase; (3) that in the 



156 SELECTED READINGS IN PUBLIC FINANCE 

supplying of gas and transportation, American cities have done 
practically nothing ; the abandonment of its gas works by Phila- 
delphia, the only large city which had undertaken the conduct 
of this service, raising grave doubts as to the desirability of a 
general municipalization of this service. 

Growth of Public Sentiment 

It is evident that if there is a movement toward municipal 
ownership, it is as yet confined to the formation of public opin- 
ion, a necessary preliminary to any practical results. An inves- 
tigation of the evidences of public sentiment shows the existence 
not merely of a widespread interest in the subject of municipal* 
ownership, but of a growing demand, particularly in the West, 
'that radical action should be taken. 

Clergymen and collegians, who may usually be depended on 
to voice conservative opinion, have in recent years been out- 
spoken in favor of municipal ownership of public utilities. The 
League of American Municipalities and the National Municipal 
League have also indorsed the movement. More conclusive 
evidence, not merely of a growing interest in the subject, but of 
a conviction that a change is desirable, is furnished by the press. 
An examination of the files of a number of leading newspapers 
for two years past shows two tendencies: (i) a universal inter- 
est in the subject and a disposition to give an increasing space 
to its discussion ; (2) a growing number of journals which advo- 
cate municipal ownership in one form or another. The more 
conservative journals — even those whose sympathies are on the 
side of private capital — dignify the movement by an increasing 
space in their columns. 

More significant is the appearance of the issue in politics. 
Chicago, St. Louis, Detroit, Cleveland, New Orleans, Columbus, 
Denver, Nashville, and San Francisco are important cities 
which have within the last four years brought the issue forward 
in political campaigns. 

******* 

Trend of Legislation 

Municipal ownership has figured with increasing prominence 
in the legislation of recent years. An examination of the legis- 



REVENUES FROM PUBLIC INDUSTRIES 15 1 

lation on this subject for the past ten years shows the following 
tendencies on the subject of municipal ownership : 

(i) Increased authorization of municipalities to erect, lease, 
purchase, and operate waterworks, lighting plants, and in a few 
cases street railways ; 

(2) Permission to issue bonds beyond the present authorized 
limit, or to tax for the special purpose of building or acquiring 
municipal plants ; 

(3) An increasing use of the referendum in deciding purchases 
or granting franchises ; 

(4) Limitation of the length of franchises and of lighting 
contracts, and permission granted to municipalities to regulate 
rates. 

Within the past ten years (1891-1901) the permission to own, 
erect, and purchase water or Hghting plants for cities of varying 
sizes has been extended to municipalities by twenty-four states. 
California and Kansas have passed very general laws providing 
for municipal ownership, and the cities of San Francisco, 
Fresno, and Pasadena have new charters with municipal owner- 
ship clauses. Denver has also obtained extended powers. 
Permission to furnish heat and power is of special interest in 
Western states. 

The distrust of elected representatives and the desire of the 
people to safeguard their interests by referring questions affect- 
ing public utilities to a popular vote is seen in a growing use of 
the referendum. Many of the enabling acts above mentioned 
provide for referring the questions involved to a popular vote. 
Minnesota provides the referendum for the purchase or erection 
of water or electric light plants in villages, or in case of an ex- 
clusive franchise ; Illinois, New Jersey, and Kansas for the 
building or purchase of waterworks ; Iowa in case the munici- 
pality wishes to sell a plant ; Nebraska for any ordinance on 
demand of 1 5 per cent of the voters ; and Indiana for any ordi- 
nance to purchase a plant on demand of 40 per cent of the 
voters. A notable example of the referendum is the recent vote 
of Chicago. 

The limitations of franchise take the form of (a) submission 
to popular vote, either required, or upon petition of part of the 
citizens; (^) specifications as to the manner of granting fran- 



152 SELECTED READINGS IN PUBLIC FINANCE 

chises, for example, by advertising, by auction, or by competitive 
bids ; (c) limitation of the term of franchises ; and (d) control 
of rates. 

A feature of especial interest in the present connection is the 
provision for ultimate municipal purchase. This provision is 
found in Florida, where the right to purchase is reserved ; in 
Colorado, after 20 years; in Indianapolis, in the charter of 1899, 
at the end of the franchise ; and in Virginia, where the right of 
purchase is reserved. 

In addition to the cases mentioned under the referendum, 
Tennessee (for cities of 36,000) and South Carolina (by a two 
thirds vote) require an expression of popular will before a fran- 
chise can be granted, and California, Missouri, and Virginia 
require that franchises should be put up at auction, and sold to 
the corporation promising the highest percentage of gross earn- 
ings. The percentage of earnings paid to the municipality must 
amount at least to two per cent for the first five years in Mis- 
souri, and three per cent in California. Wisconsin requires 
competitive bids. 

Franchises have been limited to 20 years in Kansas and 10 
years in Minnesota, where exclusive. Massachusetts has legis- 
lated for control of street railways, and special rates are required 
to be given to school children. The Indianapolis charter requires 
that street railway companies shall sell six tickets for 25 cents, 
and universal transfers. 



What does our Experience Show.? 

What, now, does the recent history of municipal ownership 
tell us of its success and its probable future ? First, it must be 
admitted that the few experiments which the larger cities have 
made in operating the more difficult services of gas and electric 
lighting are not conclusive one way or the other as to the practical 
expediency of municipal ownership. In other words, it has not 
yet been definitely estabhshed that municipal operation of public 
utihties results in cheaper and better service than is attained 
under private ownership, nor, on the other hand, do the results 
achieved point unmistakably to the conclusion that public owner- 
ship is less economical than private ownership. The four most 



i 



REVENUES FROM PUBLIC INDUSTRIES 153 

conspicuous examples of public ownership which have been used 
in recent discussions to furnish evidence in support of one or the 
other conclusion, are the Philadelphia gas works, the electric 
lighting plants of Chicago and Detroit, and the change from 
private to public ownership of gas and water plants in Duluth. 
Of these the first is commonly cited to prove the relative in- 
efficiency of public management, and the three last mentioned 
are advanced in support of public ownership. 

The evidence, however, is by no means conclusive. It is true 
that Philadelphia is receiving a larger revenue from the lease of 
her gas works than was ever derived from public ownership ; 
that the quality of gas furnished is superior, while the service 
is on a much higher plane than that rendered by the municipal 
employees. It has not been pro.ven, however, that a competent 
administration backed up by a less conservative community 
might not have secured, by a reconstruction of the gas plant, 
and a thorough renovation of the administration, a much larger 
return than is derived from the United Gas Improvement Com- 
pany, for the earnings of this company are large and increasing, 
and they might all, conceivably, have been secured for the com- 
munity. So far as Philadelphia is concerned, there is no doubt 
that municipal operation was a failure. In view of the peculiar 
characteristics of the citizenship of that city, however, it is 
unsafe to generalize from its experience. 

The municipal electric lighting plant in Chicago was exam- 
ined during 1901 by Haskins and Sells, of New York, and the 
results of the examination reported to the Reform Club were 
that during the thirteen years, 1887 to 1900, the city of Chicago 
paid ^49,423.11 more for electric lighting than if the lights had 
been rented from the private companies. This discrepancy is 
so small as to leave the issue between the two systems in doubt, 
so far as the face of the returns shows anything of the relative 
efficiency of the two systems. Certainly the result cannot be 
urged against municipal ownership. 

Moreover, Professor John R. Commons, in a critical review of 
this report, has suggested certain favorable considerations from 
another point of view, some of which the accountants could not 
notice, but which should be included in any estimate of the sig- 
nificance of Chicago's experience. These are in brief: (i) that 



154 SELECTED READINGS IN PUBLIC FINANCE 

the city paid higher wages for shorter days than the private 
company ; (2) that the great reductions in the rentals paid to the 
private companies for the hghts which they furnish to the city 
were due to the ability of the city, because of its ownership of a 
plant, to drive a good bargain with the companies ; (3) Professor 
Commons claims that the depreciation charges of the account- 
ants were too high ; and (4) that the loss from taxes on the 
property which the city has owned is excessive because the pri- 
vate companies have paid taxes on a valuation less than half the 
true value of the property. As a result of this revision of the 
accountant's report, Professor Commons reduces the estimated 
cost per lamp from $123.81 to $106.55. 

Without expressing an opinion on one side or the other, it is 
significant that such wide differences exist between the estimates 
of competent investigators. It is obviously unsafe to draw con- 
clusions from such disputed evidence. The experience of Detroit, 
Duluth, Wheeling, Grand Rapids, and various smaller cities 
which have reported, seems to show a saving from municipal 
ownership. The evidence, however, as above remarked, of these 
few isolated examples is inconclusive. 

Probable Future Development 

Moreover, as John Stuart Mill pointed out half a century ago, 
the question at issue is not between private property as at present 
managed and public ownership — if this were the only alternative, 
municipal ownership might be generally approved — but between 
private property as it might be managed and public ownership. 
In other words, while the experience of various cities, particu- 
larly in Great Britain, may be taken to indicate a balance of 
advantage in favor of municipal ownership, this is not finally con- 
clusive as to the merits of the question. We should, on the other 
hand, compare the results of municipal ownership with the results 
of the present system freed so far as possible from its abuses. 

Before indorsing so radical a departure from established prac- 
tice as is involved in public ownership of gas plants and street 
railways, we should first consider the possibility of improving 
•the service, lowering its charges, and increasing the contributions 
of private companies to the public treasury. In a strongly in- 
dividualistic community like the United States, we should expect 
that the line of development would be as follows : (i) a recogni- 



REVENUES FROM PUBLIC INDUSTRIES 155 

tion of abuses ; (2) a protest against those abuses and a trial 
of various methods of remedy ; and finally, and only if remedial 
measures failed, a radical departure from precedent in the aboli- 
tion of private property within those fields where it had been 
shown unfit longer to exist. 

The evidence thus far presented follows this line of develop- 
ment. There is a general recognition of abuses and a vigorous 
and widespread demand for a change, which has apparently 
taken the form of a movement toward municipal ownership. It 
is, however, in the nature of things, altogether probable that 
this movement will expend itself in accomplishing much-needed 
reforms. This conclusion is supported by* other than inferential 
evidence. The demand for municipal ownership is already result- 
ing in important concessions to public sentiment on the part of 
priva!e companies, which promise to accomplish the desired ends 
without resort to drastic measures. In brief, private companies 
are offering to accept shorter franchises, to improve their service, 
to reduce their rates, to increase their contributions to the public 
treasuries, and to take the public into their confidence. They 
make these concessions, it is true, under practical compulsion ; 
but they are none the less important on that account. 

25. The Commercial Revenues of Frankfort : by Anna 
Youngman.^ — American students will find much of interest in 
the following extract from Professor Youngman's study of the 
fmances of the city of Frankfort : 

This study, undertaken with a desire to learn something of 
the finances and the financial administration of the Prussian 
municipalities, has resolved itself in large part into a special 
study of the financial system of the city of Frankfort-on-the- 
Main. There are several reasons, both general and particular, 
which seem to justify the selection. To cite" first a general 
consideration : it appeared better to concentrate the attention 
upon one city, rather than to summarize cursorily the sources 
of income and the character of the expenditures of a large 
number of cities, showing bewildering, though frequently un- 
important, variations in detail. Furthermore, such a special 
study can be made to subserve a general purpose, for, despite 
the, in many respects, large powers of the Prussian communities, 

1 Reprinted from the Quarterly Journal of Economics, Vol. XXVII. 



156 SELECTED READINGS IN PUBLIC FINANCE 

they are all subject to the provisions of the Kommunal- 
abgabengesetz,^ which prescribes far-reaching regulations and 
restrictions in matters of financial legislation. As a result, there 
has been brought about a measure of uniformity which is at any 
rate sufHciently great to enable one in a specific instance to 
detect marked ''variations from the norm." 

There remain to be stated the particular reasons why Frank- 
fort-on-the-Main was selected for purposes of investigation. 
In the first place, the city, under the guidance of an able and 
energetic mayor (that is, the berbur germeister) , a student of 
finance, holding very decided opinions concerning matters of 
municipal taxation, has made some unique experiments in the 
taxation of real estate, and has itself engaged in real-estate 
operations of impressive magnitude. Likewise in the develop- 
ment of municipal industries, in the extensive control acquired 
through ownership of public-service corporations, the city 
affords material of especial interest. In fact it may be asserted 
in advance that although Frankfort probably possesses no in- 
stitutions that are not common to a greater or less number 
of other Prussian cities, it presents from the point of view of 
variety and degree of development an advanced type of com- 
munal activity. For purposes of generalization this is all the 
better, as so many more opportunities for comparison or con- 
trast with the pjactices elsewhere prevalent are offered, and, 
at the same time, a. very satisfactory composite picture for the 
study in hand is available. 

The independent, self-sustaining character of the civic life is 
another advantage for present purposes. The municipality has 
not suffered the one-sided development of certain other rich 
residential cities, such, for example, as the Berlin suburbs ; 
nor has its development been interfered with by the presence of 
central administrative activities, as in Berlin itself. Moreover, 
Frankfort has had to contend with all the problems that beset 
a rapidly growing city — one whose population has more than 
trebled in the course of thirty years (1880-1910), increasing 
over 43 per cent during the decade from 1900 to 1910. In 1910 
the city had 414,576 inhabitants, in 1880 only 136,83 1.^ . . . 

1 Hereafter abbreviated K. A. G. 

2 Statistische Jahresiibersichten der Stadt Frankfurt a. M., Ausgabe, 1910-11, 
p. II. Part of this increase is due to the incorporation of suburbs ; 31,400 due to 
the incorporation of 11 suburbs, April 1,1910. 



REVENUES FROM PUBLIC INDUSTRIES 157 

Under such circumstances there is more likelihood of finding 
a progressive financial policy striving to adapt itself to local 
changes and to local growth. 

It may well be that the developed civic consciousness evi- 
denced by the multifarious municipal activities of Frankfort is 
in part a product of its long and not remote past as a Free 
City. It has had centuries of independent political development. 
It had the beginnings of a separate communal administra- 
tion before the close of the Hohenstaufen period. Its position 
as an Imperial City (Reichsstadt) was assured before the end 
of the fourteenth century, and in the fifteenth it had attained to 
political and commercial importance of the first rank. The 
partial loss of its prestige as a great trading center was later 
recompensed by the world-wide prominence which the Roths- 
childs acquired during the Napoleonic Wars. Primarily through 
their operations, the city became an important international 
banking and stock-exchange center — a position which it held 
during the first half of the nineteenth century. The incorpo- 
ration of the city into the Prussian monarchy came in 1866, at 
the time of the war with Austria, and since then the ever- 
increasing centralization of economic as well as administrative 
activities in Berlin has, of course, detracted from Frankfort's 
one-time unique position as an international banking center. 
Nevertheless the banking interests still play an important role, 
and on account of its expanding trade and commerce the city 
has also to be reckoned with. Such a history can fairly be 
expected to give to the inhabitants a somewhat greater initiative 
than is usually found, and to make them readier to assume new 
administrative responsibilities involving large expenditures. 

^ ^ »T* 'K 'J^ -f* ^ 

After the taxes and fees the next source of income to be 
considered is that turned over to the city by the communal 
undertakings.^ The German cities in general have gone very 
far in the way of municipalizing such public-service corporations 
as water and gas works, electric-rlight and power plants, slaughter 
houses, to a lesser extent street-car lines, and other municipal 
industries of diverse description. In Prussia the communities 
as self-governing bodies have been given a large liberty in the 

1 The net balances transferred to the treasury amounted to 2,059,700 m. 
(1904-05), rising to 4,028,000 m. (1909-10) and falling to 3,627,000 m. (1910-11). 



158 SELECTED READINGS IN PUBLIC FINANCE 

extension of their operations to all sorts of industrial and social 
activities. According to a statement of the Oberverwaltungs- 
gericht, the community is permitted to bring within the field of 
its activity all that furthers the welfare of the whole body of 
its citizens or the material interests and spiritual development 
of individuals. It can establish, take over the management of, or 
lend assistance to institutions performing such public services.^ 
To be sure, the state can control community activities in so far 
as such activities necessitate the contraction of debts (and they 
usually do), for all contemplated loans must be approved by 
designated state officials. But that the state has not used its 
power to the repression of communal activity is best evidenced 
by the existing high degree of development in the German cities. 
Indeed, one can say that they have been permitted an extraor- 
dinary freedom in the carrying out of their plans, so that many 
German municipalities to-day present advanced types of so- 
called communal socialism and have become subjects of inter- 
national attention. In the front rank of such cities is to be 
found Frankfort-on-the-Main, sometimes dubbed the "Queen of 
Municipal Socialism." For purposes of the present study, these 
numerous undertakings are discussed primarily from the point of 
view of their relation to and effect upon the municipal finances. 
It goes without saying that the financial result is only one 
of many factors to be considered in determining the value of a 
particular institution. Notwithstanding which, it is a factor 
which plays a great and frequently the determining role where 
the question arises as to the expediency of a further extension 
of social activity by the communities. 

A further limitation found in the K. A. G. anent the industrial 
(gewerbliche) undertakings of the communities provides that 
they shall be so managed that the income at least covers the 
total additional expenditures of which they are the cause, 
including interest and amortization payments on the capital 
invested. Exceptions to this rule are, however, permissible, to 
the extent that a particular undertaking at the same time sub- 
serves a public interest which would otherwise not be satisfied. 
There is some room for debate concerning the necessity of 

1 Der Gemeinde-Sozialismus und seine gesetzlichen Schranken im preussischen 
Kommunalrecht, by S. Genzmer, Senatsprasident des Oberverwaltungsgericht 
{ArcAiv /iir offentliches Recht, Tubingen, 1909). 



REVENUES FROM PUBLIC INDUSTRIES 159 

providing for the extinction of the so-called "productive" debts 
(contracted to provide capital for municipal industries, profit- 
making enterprises). It is sometimes contended that if interest 
payments are met and depreciation charges allowed for, the 
citizens can regard any surplus as a disposable source of income 
which can be used to lighten the burden of present taxation. 
Considering, however, the rapid extension of the field of munic- 
ipal activity and the tremendous growth of indebtedness, it is 
likely that, were no provision made for the extinction of these 
debts, they would assume such proportions as to constitute a real 
danger. For, however farseeing the administration, however 
careful the provision made to prevent depreciation, there is no 
guarantee that existing productive investments may not become 
unproductive through the introduction of new industrial methods 
or systems. Innumerable contingencies may, in the course of 
time, arise to turn a productive debt into an unproductive one, 
burdening future generations of citizens for the sake of benefits 
enjoyed in the past. 

In the classification of communal undertakings it is usual to 
distinguish those branches managed primarily with the view to 
achieving substantial net earnings from the other institutions in 
whose management the effort to obtain financial returns, although 
not always lost sight of, is yet subordinated to the desire to con- 
fer certain social services upon the citizens. The classification 
presents considerable difficulty at times, when the two aims are 
found combined in such fashion that neither one can be considered 
paramount. Nevertheless, it is a classification not without prac- 
tical significance, for in individual cases a decision as to whether 
a particular undertaking belongs to this or to that category deter- 
mines very largely the policy pursued in the fixation of tariffs.^ 

The three communal undertakings of Frankfort-on-the-Main 
which turn into the city treasury a substantial balance are the 
water works, the electricity plant, and the street-car system. 
Yet even these undertakings are not managed with the same 
singleness of purpose that one would expect to find in the case 
of private corporations. Other than financial considerations play 
an important and, perhaps, in the case of the water works, an 

^ For general review cf. A. Busch, Die Betriebe der Stadt F. a. M., Schriften des 
Vereins filr SocialpoUtik, 129 (1-3), 1908-09. 



l6o SELECTED READINGS IN PUBLIC FINANCE 

even more decisive role. As a pure and abundant water supply 
is a social necessity of first importance, a city might well deem 
it wise to own its works, even though no net earnings were 
achieved. In Frankfort water rates are graded in accordance 
with rental values, with exemptions for the lowest rentals, the 
desire to encourage consumption by the less well-to-do being- 
recognized as of prime importance. Even the street-car system 
is not managed solely with intent to fill the city treasury, as 
will be apparent on later examination. In the case of the 
electricity works, the management can, no doubt, proceed fairly 
unhampered by considerations of social expediency. 

The other communal undertakings, although usually bringing 
in returns sufficient to meet interest and amortization payments 
on the capital outlay, and occasionally returning a net balance 
above these amounts, are, nevertheless, not managed as similar 
private capitalistic enterprises would be, not even in those cases 
Avhere they compete with or have superseded private enterprises. 
Their efficiency cannot, therefore, be judged with reference to 
the financial gain obtained or the financial burden which their 
maintenance entails. For example, the establishment of city 
stockyards and slaughter houses with compulsory slaughtering 
and compulsory examination of the animals to be slaughtered 
is to be regarded as a police measure undertaken in the interests 
of the public health.^ The fees are rather in the nature of taxes 
than of payments in the private economic sense, for, where 
compulsion takes the place of voluntary payment, the community 
in its political capacity rather than as entrepreneur is function- 
ing.2 There are further included under communal undertakings 
functioning in the interests of the public health and comfort the 
sewage (canalization) system, the removal of garbage, the estab- 
lishment of public baths, the maintenance of city markets. The 
city savings bank, designed to meet the needs of the poorer class 
of citizens, can be regarded as a philanthropic institution, and, in 

^ Gemeindebeschluss betr. den Schlachthauszwang (Biirgerbuch). 
: 2 On ti^ig point cf. J. Pfitzner, Die Entwicklung der kommunalen Schulden in 
Deutschland, p. 194. 

It must be conceded that in all cases in which the city has acquired a monop- 
oly, whether legal or actual, the payments for services become, theoretically 
speaking, taxes (fees). Whenever the inhabitants must take their water from the 
city water works, must obtain their electricity from the city plant, etc., the sums 
paid are as much fees as are the sums paid for the use of any other city institutions. 



REVENUES FROM PUBLIC INDUSTRIES l6i 

a smaller way, the city pawnshop likewise. Finally, the enormous 
outlays for harbor improvements which have been made by the 
city have been incurred for purposes for which private capital 
would have been unavailable. However important these expendi- 
tures may be in furthering the general commercial and industrial 
interests of the city, they offer no prospects of an adequate 
direct return upon the sums invested for many years to come. 

In the listing of the communal undertakings {Gemeindebe- 
triebe) there is an element of arbitrariness which must not be 
lost sight of. If one wonders why canalization and garbage 
removal should be included in the list any more than street 
paving or street cleaning, one also wonders why the cemetery 
management should be excluded from the list and put under 
"general administration," when, as is the case in Frankfort, 
the city is an ardent competitor of the local undertakers, furnish- 
ing coffins and funeral robes, as well as making other necessary 
arrangements for burials. The distinction is, indeed, in part a 
matter of bookkeeping, depending upon whether or not the 
particular branch of city activity has a separate and independent 
account or is subordinated to some department of the general 
administration. But the segregation has a less superficial justi- 
fication ; there is usually some solid reason for separating these 
particular branches of city activity from the general adminis- 
tration. They all approach more or less nearly the character of 
private undertakings with definite sources of income and cal- 
culable expenditures. And all of them might conceivably be 
private capitalistic enterprises. If the distinctions are not always 
logically satisfying, the list can at any rate be provisionally 
accepted and later enlarged to include other municipal under- 
takings which seem properly to belong here. 

Before proceeding to a more detailed discussion a further 
caution is necessary. The estimates of the profitableness of the 
investments from a financial standpoint can only be stated 
approximately. The various communal enterprises have many 
contracts with one another, the expenditures of one frequently 
constituting the income of another. In the case of such formal 
bookkeeping transfers, it may w^ell be that the sums credited 
and debited would be quite different were the contracting con- 
cerns under separate ownership. An analogous case is presented 
by the contracts between the constituent concerns belonging to 



l62 SELECTED READINGS IN PUBLIC FINANCE 

the same trust. Their accounts are kept separate, their mutual 
contracts, deliveries, etc. are credited and debited to the particu- 
lar estabHshments concerned; but there is, nevertheless, an 
element of arbitrariness about the proceeding which makes the 
results open to question. Then the amount carried to renewal 
funds is a very fluctuating quantity, sometimes sufficient to pro- 
vide for improvements and extensions as well as renewals, or, 
again, if the financial need be greater than available revenues, 
the renewal funds may be robbed of their just quotas, and the 
proceeds transferred to the city treasury. 

The city water works ^ have had expended upon them 40,053,000 
m., of which 26,444,000 m. remained, April i, 191 1, a part of 
the city debt. Despite the fact that the management has to 
meet deficits incurred by the smaller works of the recently 
incorporated suburbs, the returns are considerable. In 1910-11, 
683,500 m. were transferred to the account of the city treasury, 
while the total returns (including interest and amortization 
payments) amounted to 2,697,600 m., or 6.^ per cent of the 
amount of the capital invested. In 1907-08, among "jj German 
cities reporting, all of which with a few minor exceptions owned 
their water works, Frankfort showed the largest absolute net 
returns (including interest and amortization payments), exclu- 
sive of Berlin. Even Hamburg had a less net surplus from 
operations. The capital value of the plant was likewise far in 
excess of that of any city save Berlin ; but the net income 
expressed as a percentage of the investment value was modest 
(at that time 7.1 per cent) when compared with 16.6 per cent 
for Essen, and returns variously in excess of 10 per cent for 
22 other cities. 2 The reason is no doubt to be found in the 
generous provision which Frankfort makes for securing an 
abundant water supply — the installation of meters being re- 
stricted with a view to encouraging the liberal use of water. 
In consequence, the per capita consumption is about ZZVz P^^ 
cent greater than that for the city of Berlin. 

Water for drinking is piped from springs in the nearby hills 
or (largely) from underground sources by pumping, while the 

^ Cf. Venvaltungsberichte and Haushaltsplane der Stadt. 

2 Statistisches Jahrbuch deutscher Stadte, 1910, article Wasserversorgung, 
1907-08. Statistisches Amt, Niirnberg. 



REVENUES FROM PUBLIC INDUSTRIES 163 

water for non-drinking purposes is conveyed directly from the 
river. In Frankfort proper the water intended for the use of 
factories and for industrial purposes in general is paid for by 
meter. In all other cases the payment is regulated according 
to rental values.^ For example, in the case of dwelling houses, 
for each 25 m. or part thereof of the yearly rental value, a water 
fee (Wassergeld) of i m. must be paid, with the proviso, how- 
eve^, that dwellings with a rental value of less than 250 m. 
remain free from the payment.^ Here is an interesting illustra- 
tion of a tariff based rather on the ability to pay of those served 
than on the amount of the service. However rude a measure 
rental values may be, they permit a certain large discrimination 
to be made. Special rates are made for rooms or apartments 
devoted to business or industrial purposes, where water for 
the conduct of operations is not necessary. A special tariff is 
also in force for water used in courts and gardens, the area 
being the basis of measurement. Where the meter system has 
been introduced, the price per cubic meter varies at different 
seasons of the year with the amount consumed and with the 
character of the use. 

Wherever the price of water is fixed, as is so largely the 
case in Frankfort, according to certain standards which give 
only a vague indication, if that, of the amount consumed, the 
water supply must needs be large. For the current year, indeed, 
the management has for the first time to pay a large sum, ex- 
ceeding 800,000 m., in order to obtain additional supplies from 
a neighboring water works. As a result the anticipated net 
returns for 1912-13 have been considerably cut down, and the 
expediency of a rapid extension of the meter system has in 
consequence been discussed. 

In 1898 Frankfort took possession of its street-car lines ^ 
(then a horse-car system) paying to the private company in 
control 2,230,000 m. and contracting to pay further until 191 5 a 

^ In the suburbs payment according to meters is general. 

2 Wassergeld, Burgerbuch, p. 314. For the coming year (191 2-13), the rate has 
been increased -^ for rentals 400-500 m., j\ for rentals 500-1500 m., y^g for 
rentals 1500-3000 inclusive, | for all higher rentals. Dwellings bringing less 
than 400 m. are, however, entirely freed from payment. 

3 Cf. Die Stiidtische Strassenbahn F.a. M. (" Im Auftrage des Stadtischen Elek- 
trizitats- und Bahnamtes aus Anlass der 10. Hauptversammlung des Vereins, etc.") 
Betriebsdirektion, 1905. 



l64 SELECTED READINGS IN PUBLIC FINANCE 

yearly sum of 326,872 m., as compensation for the unexpired 
term for which the charter had to run. The city gave out the 
contract for electrification of the road, and upon its completion, 
April I, 1900, took over the management definitively. The net 
returns, 1910-11, amounted to 1,147,300 m. (exclusive of interest 
and amortization payments). For the purpose of comparing 
the returns with those of private corporations, however, other 
payments which fig\ire as expenses must be included lyider 
returns.^ 

For example, the contribution to the erstwhile 

Trambahngesellschajt 326,872 m. 

a payment to the city Waldbahn (forest railway) 

to cover a deficit 156,111 m. 

and the interest and amortization payments . . 1,015,901 m. 

constitute a total of .......... . 1,498,884 m. 

to which must be added 1,147,340 m., the so-called net earnings, 
bringing the thus estimated earnings up to 2,646,200 m., or 
12.9 per cent of the amount of the capital invested (20,497,- 
000 m.). The contributions to pension funds for employees 
(236,900 m.) may be regarded as a legitimate item of expense, 
although the generous provision which is made disturbs the 
reckoning for comparative purposes, not only in this case, but in 
that of all other city enterprises. The payments or transfers 
growing out of contractual relations with other city departments 
introduce an additional element of uncertainty. The chief ex- 
pense of operation, for example, is the payment made to the 
city electric works for the power needed; in 1910-11, 1,139,- 
730 m. (delivered at the rate of 9 pf. per kilowatt hour).^ The 
company likewise contributes 165,000 m. to street paving, re- 
pairs, street widening, etc., and 70,640 m. to the city treasury for 
its share of general bookkeeping expenses. 

It has further to be considered that for a public corporation, 
the improvement and extension of the service is frequently 
emphasized to the detriment of the net returns. To illustrate : 
in 1910-11 the total income of the company was increased 
515,000 m., but at the same time there was a diminution in net 

1 Cf. Verwaltungsbericht, 1910-11, and Haushaltsplan, 191? -13, pp. 509 ff. 

2 Cf. Haushaltsplan, 1912-13, p. 509. 



REVENUES FROM PUBLIC INDUSTRIES 165 

returns,^ the cause being assigned to an increase in wages, 
together with shortening of the working period, to the ac- 
quisition of non-paying lines (needed to open up the suburban 
territory, always with the idea of relieving congestion in the 
older parts of the city), and finally to the great amount of travel 
at reduced rates. This last point deserves elaboration for several 
reasons. The fee system, as has been previously emphasized, 
is highly developed in German municipalities, and where possible 
and desirable, charges for the same services are frequently 
graded according to ability to pay. Frankfort, for instance, in 
addition to the normal tariff for its city railway, varying with 
the distance traveled, makes special rates for workingmen for 
the journey between their homes and places of employment.^ 
The reductions are very considerable — about 50 per cent below 
the normal price — and are only granted to independent, self- 
supporting workers on the presentation of evidence that the 
applicant has a yearly income under 2000 m. The number of 
cards issued in 1910 was 495,255, as against 69,940 in 1904, 
the first year when the system was tried. Of the total number 
of passengers carried during the year, 30.6 per cent traveled 
at these reduced rates. The tariff serves a double purpose, not 
only making a justifiable reduction for the sake of benefiting 
the laboring classes, but also encouraging a more extensive 
distribution of population, helping to relieve congestion within 
the older districts, and thereby indirectly aiding the efforts 
which are being both publicly and privately made to provide 
cheaper and more healthful dwellings for the poorer citizens. 

Of 81 German cities listed in the " Statistisches Jahrbuch 
deutscher Stadte" (Statistical Yearbook of the German Cities)^ 
33 owned their street-car systems, among these being 8 cities 
with over 200,000 inhabitants. The financial condition of these 
lines Avas, however, at that time (1907-08) by no means so 
favorable as that of the Frankfort city railway, 13 companies 

1 The working expenses have risen from 55.4 per cent (1904) of the income 
from operation to 59.5 percent; the gross earnings in 1904 were 2,452,000 m.; in 
1910, 3,631,000 m. The net earnings (1904), 983,156 m.; 1910, 1,147,340. The net 
earnings show a decided reduction, however, compared with the previous year, 
1,609,600 m., and were smaller than for any year since 1905. 

2 So-called "weekly" cards are issued, good for a single journey on each work 
day before 7.30 A. m. or for going and returning after 4 P. m. 

3 17. Jahrgang, article Stadtische Strassenbahnen im Jahre 1907, O. Landsberg, 



I66 SELECTED READINGS IN PUBLIC FINANCE 

even requiring dotations from the city treasuries. Frankfort, 
indeed, received the largest returns of any city listed (2,828,- 
000 m.), although its capital was then only one-third as great as 
that of the Dresden street-railway company, with a return of 
only 2,740,000 m., and not quite so large as the capital invest- 
ment of the street railway in Munich, with an income of 1,170,- 
000 m. The returns here used for comparative purposes include 
not only the sums turned over to the city treasury, but also 
interest and amortization payments, and the amounts transferred 
to renewal funds. The so-called "net" returns are too variously 
conceived to be available for purposes of comparison.^ And in 
any case the statistics have to be taken with reservations. The 
street-car system of Cologne, for instance, debited with an 
advance of over 334,000 m. from the city treasury, is charged 
with contributions for the upkeep of the city streets (283,600 
m.), and also burdened with the payment of a large sum to its 
predecessor, a private company, amounting to 1,103,900 m. 
Excluding these extraordinary payments, the deficit is turned 
into a net balance. Making allowance for such inequalities, 
however, Frankfort stands, financially speaking, well at the 
head of those cities operating their own street-railway systems. 
The electricity works is another one of the municipally owned 
undertakings which bring a considerable sum into the city 
treasury.^ The capital expenditure, 16,932,000 m., provided 
almost entirely through loans, has been in part repaid, to the 
amount of 2,179,000 m. (March 31, 1911).^ The net returns 
transferred to the city treasury in 1910-11 totaled 2,898,800 m., 
and together with the interest and amortization payments the 
entire income was 3,774,700 m., or 22.2 per cent of the amount 
of the capital outlay. It should be noted, however, that for the 
year in question no transfer was made to depreciation funds* 
— an omission which was due to the desire of the city to find new 
sources of revenue without increasing the taxes. This vicious 

1 Dresden is credited with a net return of 300,000 m. in 1907 ; Munich, 472,000 m.; 
Frankfort, 1,280,000 m., 1906-08. Cf. Statistisches Jahrbuch deutscher Stadte, 17. 
Jahrgang, pp. 626-627. 

2 Cf. Verwaltungsberichte and Haushaltsplane. 

8 Electric works No. 2, located in the suburb of Bockenheim, has a capitalization 
of 2,885,000 m. (repaid 427,700 m.). It is able to meet interest and amortization 
payments, and to turn an insignificant balance, 2860 m., into the treasury. 

* Nor are any sums written oif for depreciation in J911-12 and 191 2-1 3. 



REVENUES FROM PUBLIC INDUSTRIES 167 

practice constitutes one of the greatest dangers for the future 
solidity of communal undertakings, and cannot be too strongly 
deprecated. 

The fees charged vary according to the purposes for which 
the electricity is used^ (whether for illuminating purposes, or 
for electric motors, heating, etc.), and also with the amount 
consumed. The owners of meters likewise pay a monthly rent 
for their use, and a single payment for installation, usually 
50 m., is also required. 

In the last year for which comparative statistics are avail- 
able, 1907, Frankfort was again occupying a leading position 
among the 59 German cities reported as owning their own 
electric-light and power plants.^ The net returns from operating 
were slightly in excess of those for Munich, and far ahead of 
those of any other city, Cologne coming next with 1,583,000 m.^ 
Notwithstanding this fact the price of electricity in Frankfort 
is rather below the usual rate charged elsewhere,* the most 
frequent charge for illuminating purposes being 60 pf. per 
kilowatt hour ; for power, 20 pf. (in 30 cases), and frequently 
25 pf. (11 cases). The delivery of power to the city railway at 
a rate of 9 pf. (2 cents) appears relatively rather low, although 
a number of other cities charge at about the same rate. The 
sum with which the works are credited for street lighting is quite 
small, 85,000 m., as the city lighting is largely provided for by a 
private company : the Frankfort Gas Company. The city owns 
one small gas works in a recently incorporated suburb, Hed- 
dernheim. The returns had to be supplemented, 1910-11, by 
a small advance from, the city treasury, 17,770 m., in order to 
meet all outlays, including interest and amortization.^ 

1 Gebiihrenordnung, Biirgerbuch (Elektrische Gebiihren). 

2 Statistisches Jahrbuch deutscher Stadte, 17. Jahrgang: Beleuchtungswesen 
im Jahre 1907, by E. Tretau, Direktor des statistischen Amtes Altona. Returns 
were received from 83 cities. 

3 These sums also include interest and amortization payments and transfers to 
renewal funds. 

* The Frankfort tariff for illuminating purposes : yearly consumption up to 3000 
kilowatt hours, at the rate of 50 pf.; for each succeeding 3000 kilowatt hours, 40 pf. 
per kilowatt hour; for electric motors, etc., 15 pf. per kilowatt hour in May, June, 
and July, and for the rest of the year, 25 pf. from 5 P. M. to 9 P. M. 

5 That Frankfort does not own the local gas works is due to the fact that the 
company supplying the city with gas has charter concessions, granted in the 50's, 
which do not expire until 1959. This private company pays the city for the privilege 



l68 SELECTED READINGS IN PUBLIC FINANCE 

Next in order of discussion, following the undertakings which 
turn over substantial net balances to the city treasury, comes 
the harbor management. Enormous expenditures have been 
made for harbor construction and for the acquisition and laying 
out of adjacent territory to be utilized for factory sites. No 
adequate return can bq expected on the capital outlay for many 
years, although it is hoped that the indirect financial gain to 
the city through its increased importance as a commercial ship- 
ping port will justify an outlay which makes a very substantial 
addition to an already large city debt.^ Until 1886, when the 
Main was canalized, and opened for traffic from Frankfort 
to the Rhine, the city could only be reached by small boats, 
and was of no importance whatever as a river port. Since 1886, 
however, the river trade has grown steadily until Frankfort 
now ranks sixth among the Rhine ports. The chief imports, 
coming for the most part up the river from the Rhine, consist 
of coal, coke, etc. (50 per cent). The grain trade is also of 
considerable magnitude — the grain imports, largely foreign, 
being transferred at Rotterdam to the Rhine vessels. Building 
materials are the only other important group of wares for the 
river trade. The existing West Harbor, completed at the same 
time that the canalization of the Main was finished, represents 
an outlay of over 7,400,000 m., including expenditures for ware- 
houses, a customhouse, and equipment of various sorts,^ but 
excluding the cost of the railway station. The warehouse fees, 
wharf dues, payments for the use of cranes, wagons, etc., bring 
in quite considerab^ sums, so that the West Harbor manage- 
ment, in addition to meeting interest and amortization payments, 
was credited with a very small balance, 13,000 m. (1910-11). 
The warehouses and customhouse, for which separate accounts 
were carried, needed an advance of ^6,yyo m. in order to cover 

of using the streets (over 395,000 m.) and is in turn reimbursed for city lighting 
(409,000 m.). The city owns shares of the Frankfurter Gas Gesellschaft for which 
6,450,000 m. have been expended. For the last purchase, 1910, a loan of 3,000,000 m. 
was obtained from the city savings bank. 

1 Der Osthafen in F. a. M., Denkschrift liber die Erbauung eines neuen Handels- 
und Industriehafens im Osten der Stadt : Stadtisches Tiefbauamt, 1907. Cf. also 
Der neue Osthafen, by Magistratsbaurat H. Uhlfelder. 

2 Rechner-Amt, Sonderabdruck, p. 40. Baurat Uhlfelder estimates the total 
cost of the West Harbor, together with the warehouses and customhouse, at about 
1 2,000,000 m. I do not know the reason for the great discrepancy in the estimates. 



REVENUES FROM PUBLIC INDUSTRIES 169 

all outlays ; but that advance was simply a bookkeeping transfer 
from the harbor management proper to the other departments. 

The facilities afforded by the West Harbor not being adequate 
to meet the needs of a growing commerce, the city was led to 
embark upon an ambitious new project, involving the construc- 
tion of a second, "East" Harbor, and the purchase and laying 
out of an enormous adjacent territory, intended to serve as a site 
for factories and industrial establishments in general. Already, 
a large part of the contemplated plan has been executed. The 
lower East Harbor, running about 2.5 km. (somewhat over i^ 
miles) eastward from the city, includes an open river harbor, lead- 
ing into which are two basins parallel with the Main. The tongue 
of land between the Main and the outermost basin is intended for 
industries needing immediate water connections (land here has 
already been taken up by milling establishments) . Other locations 
on the water are variously intended as storage places for coal and 
other freight, and to the north of the inner basin are located the 
warehouses, dock-yards, etc. Cranes, wagons, all the machinery for 
loading and unloading, have been installed by the city. Just back 
of the warehouse district is a section for factories, without imme- 
diate water connection, but very accessible, nevertheless, as broad 
streets have been cut through, and shipping facilities provided. 

The upper harbor district runs eastward from the lower for 
about 2km. (i^ miles). At present only the western end of this 
upper region, away from the river, and the main connecting 
streets have been laid out. The harbor facilities proper are to 
include a basin parallel to the Main, from which three others 
will branch off. In general this district is intended for industrial 
sites, and provision is to be made, furthermore, for direct trans- 
fers between ships and railway. A section here is also without 
immediate water connection. The third main division, the Seck- 
bach industrial district, extends northward away from the river, 
being connected with the harbor region by streets cut directly 
through, and having also railway connections. Only about two- 
thirds of this district has as yet been opened up. 

The establishment of a harbor for industry (Industriehafen) is 
an interesting experiment,^ and, viewed in one aspect, it is to be 

1 Frankfort is not a pioneer in this instance. Similar projects have been carried 
out, first in Bremen, then in Strassburg, Karlsruhe, Kehl, Mainz, Diisseldorf , Mann- 
heim, and Crefeld. 



170 SELECTED READINGS IN PUBLIC FINANCE 

regarded as one of the many attempts which the city makes to 
cope with the difficulties connected with the high price of city 
lands. Among the reasons given in favor of the project in 
question^ were the limited number of available factory sites in 
the city, and the high land values which make the establishment 
of new industries or the development of local branches, especially 
those needing much land, almost impossible. In many instances, 
furthermore, proper railway connections could not be had, while 
a situation near the water or in the neighborhood of quays was 
seldom obtainable. In the new district it is thought that the 
excellent water connections will mean a saving of expense in the 
case of raw materials brought by water, and the concentration 
of industry will also make possible a cheapening of water, light, 
and power provided for industrial purposes. 

Up to April, 191 1, land to the amount of 360,493 qm. had 
been sold to 35 firms, the proceeds amounting to 9,095,800 m.,^ 
an average per qm. of 25.3 m. Of these 35 firms, 4 were new 
enterprises and 9 were establishments moving into the city from 
elsewhere. A smaller number of rental contracts have been 
entered into, bringing a total income of only 61,100 m. Whether 
the optimistic views of the supporters of the East Harbor proj- 
ect, who anticipate an inflow of capital and a rapid settling of 
the new territory, will be confirmed remains to be seen. In 
certain official quarters, at any rate, the attitude is rather scepti- 
cal. There must be very urgent reasons at hand to induce out- 
side firms, which can obtain good factory sites for 3 and 4 m. 
per qm. in other cities, to settle in the Frankfort harbor district, 
w^here the cheapest land brings 15 and 16 m., and the best 
locations on the water 40 m. On the other hand, there are dis- 
tinct advantages to be got from the presence of a skilled and 
abundant labor supply, and from the favorable location of the 
city as a commercial center. And for those establishments op- 
erating with large capitals, for which the payment for land (or 
rentals) is a relatively unimportant item of expense, the higher 
prices need not always deter. 

1 Cf. Denkschrift, pp. 33-34. 

2 Cf. Der Neue Osthafen, by Uhlfelder. During the past year about 700,000 m. 
was obtained through further sales. Terms : usually a first payment of 10 per cent 
and thereafter 9 yearly payments, interest 4^ per cent. Occasionally a fifteen-year 
term of payment is granted. 



REVENUES FROM PUBLIC INDUSTRIES 171 

The estimated costs of the completed project (including land 
purchases and construction costs) are set at 72,000,000 m. Up 
to the present time, loans amounting to 20,500,000 m. have been 
used to defray the costs of land acquisition. Much of this land 
was already city property or belonged to city foundations, which 
had to be reimbursed for relinquishing their holdings. A much 
smaller part, but a part acquired on much harder terms, naturally, 
belonged to private individuals. From these various sources, 
the Special Fund for City Real Estate {Spezialkasse fur stddtischen 
Grundbesitz), acting for the East Harbor management, acquired 
3,304,300 qm. of land for the project. The debt for construction 
costs now amounts to 13,800,000 m., making a total outstanding 
indebtedness for the East Harbor account of 34,300,000 m. The 
amortization payments on the debt for construction costs began 
in 1910, but in the case of the debt for land acquisitions these 
payments do not begin until 1918 (15,000,000 m. loan, 1907) and 
1922 (5,500,000 m. loan, 191 1 ) respectively. The rate, however, 
is higher, 3)^2 per cent, and the extinction of the debt will there- 
fore be consummated in about the same time as if payments had 
been allowed for from the period of issue at the usual rate of 
2 per cent.^ 

The regulations for the East Harbor provide that it shall be 
managed as an independent undertaking.^ The land, further- 
more, is to be utilized either through sale or lease (the latter 
method being preferred),^ the prices to be so fixed that the entire 
costs of construction and of land acquisition, including loss of 
interest, shall as far as possible be covered. At present all re- 
turns from sales, all proceeds of rentals, are transferred to a 
special interest and amortization fund {Zinsen- und Tilgungsfonds), 
from w^hich current interest and amortization payments are to be 
defrayed. It was estimated that this fund on April i, 1912, would 
amount to 11,924,000 m. With the current year, the East Harbor 
begins existence as an independent city enterprise* {Gemeinde- 
betrieb), which must depend upon its own sources of revenue, or, 
where those are not sufficient, upon dotations from the city. Just 

1 [Statement of Stadtrat Dr. Bleicher.] 

2 Grundsatze fiir die wirtschaftliche Durchfiihrung des Osthafenprojektes, 
Mar. 6, 1908. Cf. Biirgerbuch. 

3 As a matter of fact, most of the land taken up has been sold. 
* Cf. Haushaltsplan, 191 2-13, p. 560, and zdt'd., p. 369. 



1/2 SELECTED READINGS IN PUBLIC FINANCE 

so long as this independent standing was not recognized, there 
was danger that the deficits (which are hkely to exist for years 
to come) would be recurrently met by fresh loans, instead of 
being defrayed out of ordinary sources of income. As it is, the 
advance from the city for the year 1912-13 is exceedingly 
meager, 95,000 m. only ; and the interest and amortization pay- 
ments on the debt wall have to be taken in large part from the 
special fund, the contemplated withdrawals amounting to 1,378,- 
000 m. How long this fund will prove adequate to meet the out- 
lays for interest and amortization depends entirely upon the 
amount and the rapidity of sales. In 1918, too, an increased 
burden will be put upon it to provide amortization payments at 
the rate of 3^ per cent on the first debt of 15,000,000 m. A more 
liberal policy on the part of the city in making yearly advances, 
and consequently less heavy withdrawals from the fund, might, 
assuming fairly favorable conditions of sale, enable the latter to 
satisfy all demands. But in all probability the city will eventually 
be face to face with the necessity of meeting large deficits 
through much larger dotations, or else of incurring new debts 
to meet recurrent expenses. 

The Verbindungs- und Hafenbahn, which has been greatly ex- 
tended to meet the needs of the newly opened up district, is also 
city property. Although the sum of 98,600 m. was obtained in 
1910-11 from leasing the road to the state railway, the city had 
to meet a deficit, amounting, however, to only 45,900 m. No 
doubt with the increased trafiic to be hoped for within the next 
few years, the deficit may be turned into a surplus. 

A communal undertaking recognized to be of great importance 
to the public health is the canalization system. Indeed, save 
for the fact that the department is segregated from the general 
administration and has its own individual sources of income, it 
seems hardly to belong with the other listed communal enter- 
prises. The system has involved a capital outlay of 26,547,000 m.,^ 
the debt incurred having been in large part repaid, however, so 
that the department, with the aid of a slight advance from the 
city (88,700 m. in 1910-11), can meet expenses and provide for 
interest and amortization payments (487,000 m.) on the still 

1 Rechner-Amt, p. 40, Sonderabdruck. Sewage systems of the suburbs and 
establishments for sewage purification and burning of refuse are included. 



REVENUES FROM PUBLIC INDUSTRIES 173 

existing indebtedness (10,030,000111.^ in 1910-11). The fees, 
amounting to 1,145,300 m. (1910-11), are a very considerable 
source of income.^ For new sewage installations, the payment is 
30 m. for each meter of street frontage, and since 1897 an addi- 
tional sum (Zusatzgebiihr) is raised varying according to the 
value of the buildings erected on the property concerned. In case 
of new installations, changes, improvements, etc., the payment 
follows at the rate of i per cent of the building costs, exemptions 
being allowed for buildings with a valiie of less than 1000 m. 
In addition to these extraordinary payments, every occupant of 
dwellings or rooms connected with the city canalization has to 
make a yearly payment graded according to rentals. Dwellings 
with 300 m. rental value or less are freed from the payment. 
For shops and establishments whose owners are taxed on a lesser 
income than 6000 m. one-half the rental payment may be made 
the basis of measurement, provided that that one-half equals at 
least two-thirds of the amount of the taxable income of the per- 
son in question. Again comes an interesting illustration of the 
grading of fees to the advantage of the small households and 
of the less well-to-do trades people. 

The sewage is purified by a mechanical process before being 
permitted to flow into the Main. The coarser particles are 
trapped and burned, the refuse serving as fuel for the generation 
of electric power, not only sufficient to meet the needs of the 
plant in question, but enough to bring in a return of 121,700 m. 
from outside sources, mainly the city water works, and more 
lately the water works and the electric power plant also. 

The transport of garbage^ is undertaken by the Fuhrpackver- 
waltung (hauling department), which also has charge of the re- 
moval of the refuse of industrial establishments, the city markets, 
the public schools, etc. The same department also does the neces- 
sary hauling for the various departments of the city administra- 
tion which require its services, in this case payment being 
reckoned according to a fixed scale and the sums debited to the 
various departments and offices for which services are performed. 

1 Total indebtedness previously canceled 5,497,800 m. to April 191 1, Haushalts- 
plan, 1912-T3, p. 23. 

2 For Frankfort, exclusive of the suburbs, the fees amount to 962,700 m. 

3 Verwaltungsbericht, Fuhrpackverwaltung. 



^174 SELECTED READINGS IN PUBLIC FINANCE 

The fees"^ for garbage transport are also graded according to 
rental values. For each lOO m. of rental, or fraction thereof, 
50 pf. is paid. Again, the removal is free of charge if the rentals 
are 300 m. or less. Likewise, reductions similar to those made in 
the case of sewage payments are granted in the case of business 
or industrial establishments whose owners are taxed on an in- 
come of less than 6000 m. 

Frankfort is one of the many German cities which are in pos- 
session of their own slaughter houses and stock yards,^ and 
which require all slaughtering undertaken within the city limits 
to be done in the municipal slaughter houses. All meats, whether 
slaughtered within or without the city, must be examined, unless 
the latter are labeled to show that they have been subjected to 
an approved examination ; and imported meats must be sold 
separately in any case. The income consists largely of slaughter- 
house fees,^ cold-storage fees, a market fee for the animals 
brought to the stock yards, and fees for the examination of the 
stock. The returns from the stock yards and slaughter houses 
are quite considerable, if interest and amortization payments be 
considered, although the sums turned into the city treasury are 
insignificant and frequently a deficit is recorded. The interest 
and amortization payments amount to 512,700 m. for the 
slaughter house and stock yards together, which represent an 
investment value of 9,637,000 m. Adding thereto the slight net 
balances, the return on the capital investment for 1910-11 
amounts to 5.6 per cent. 

The city markets return slight net gains (25,540 m. in 1910- 
11),* which, however, are assignable to the special markets and 
fairs held several times yearly, in accordance with ancient cus- 
tom, in the open streets. The regular markets do not quite meet 
all expenses, including interest and amortization payments on the 
debt, although the deficit is very slight (21,075 m. in 1910-11), 
and, as has been said, more than covered by the surplus from the 
special markets and fairs. The total returns, including interest 

1 Gebiihrenordnung betr. Kehrichtabfuhr, cf. Biirgerbuch ; also Adressbuch 
der Stadt. 

^ Of 41 cities with over 100,000 inhabitants, 38 possessed their own slaughter 
houses (1908). Of 85 cities with a population of 50,000 or more, 81 owned their 
slaughter houses. 

^ Cf. Bekanntmachung betr. Gebiihrenerhebung auf dem Fchlacht- und Vieh- 
hof, 16 Marz 1901. 4 Haushaltsplan, 1912-13. 



REVENUES FROM PUBLIC INDUSTRIES 175 

and amortization, amount to 134,740 m. and represent a very- 
creditable return of 6.4 per cent on a capital investment of 
2,092,000 m., or, excluding the returns from the special fairs, 
4.4 per cent. The city owns four market halls, and collects fees 
for the use of the stands, which vary with the location, the area, 
and the days used, the fees being higher on Wednesday and 
Saturday.^ 

The public baths, containing swimming pools, shower baths, 
etc., a free river-bathing resort, and suburban bath houses, have 
a deficit of 78,600 m. to show (1910-11), although the income 
from fees (232,000 m.) is fairly large. The interest and amorti- 
zation payments on an investment sum of 1,404,052 m. amount 
to 64,800 m. The bath houses are therefore the only city enter- 
prise^ receiving an advance which exceeds in amount the sums 
required to meet the interest as well as the amortization pay- 
ments on the capital debt. However, since the public baths are de- 
signed primarily to meet the needs of the poorer citizens, the fees 
may properly be reduced below the value of the services paid for. 

The city pawnshop, which dates from the beginning of the 
i8th century, is maintained with the purpose of protecting needy 
borrowers from excessive exactions.^ The establishment does 
not always quite meet expenses, although the attempt is made 
to obtain an income that will at least cover, but no more than 
cover, the outlays.* The working capital advanced by the city 
treasury amounted to 746,000 m. (1910-11) for which an interest 
payment of 25,178 m. was made. 

The city savings banks ^ grew out of a small suburban institu- 
tion which became the property of the city in 1895, when Bocken- 

1 The city has only once arranged to sell food supplies directly to the people, 
as is frequently the case in other cities, where attempts have been made to relieve 
the distress caused by high prices by selling fish, milk, etc., even by establishing 
communal bakeries. In the fall of 191 1, however, the municipality bought potatoes 
which were sold at cost, with the result that the prices which had been extraor- 
dinarily high as the result of a bad season fell rapidly. 

2 That is, exclusive of the Verbindungs- und Hafenbahn^ which is operated by 
the Prussian State Railway. 

3 In addition to the city establishment, a number of licensed pawnbrokers are 
certified as being more reliable. 

* Ordnung fiir das Pfandhaus der Stadt F. a. M. 

5 Denkschrift aus Anlass des 5ojahrigen Bestehens der stadtischen Sparkasse 
zu F. a. M. hrsg. vom stadtischen Sparkassen-Amt, Januar 1910; also cf. Verwal- 
tungsbericht, 1910-11. 



176 SELECTED READINGS IN PUBLIC FINANCE 

heim was incorporated. The operations of the bank were sub- 
sequently enlarged to include the whole city, and the deposits in- 
creased rapidly until in 191 1 they reached the considerable sum 
of 28,288,000 m.^ All gains are transferred to the reserve fund 
which amounted, April i, 191 1, to 515,000 m. The majority of the 
depositors are servants, day laborers, factory workers, appren- 
tices, assistants, etc., and the size of the average deposit is small 
(740 m.). In the period from 1901-10 over 1000 accounts aver- 
aged less than 60 m., and only 163 over 10,000 m. The largest 
number varied from 600 to 1500 m. The number of separate 
accounts for the period averaged 34,860.^ 

A city savings bank has come to be a typical feature of Ger- 
man municipalities, and indeed serves a double purpose, as a se- 
cure investment for small savings and as a means of bringing 
together sums which would otherwise have been hoarded, and 
would have been unavailable, therefore, for purposes of capital 
investment. Where the cities use such funds to satisfy in part 
their own credit needs (either through sales of their bonds to the 
savings banks or by means of other borrowing operations) there 
is undoubtedly an element of danger present — a danger that 
these funds held in trust may be employed too freely in financing 
the operations of the trustee. In 1908 Dr. Most published a 
list of the creditors of those German cities having over 25,000 
inhabitants. Of the bonds amounting to 2,143,172,000 m. the 
communal savings banks held 132,286,000 m. belonging to their 
own cities, 10,900,000 m. belonging to other cities, making 6.J 
per cent of the total. Of the other city loans (not funded) 
amounting to 550,900,000 m., the communal savings banks were 
credited with 142,580,000 m. (25.88 per cent), loans made to their 
respective cities.^ The Frankfort savings bank is not to any 

1 Interest paid depositors at present 3^ per cent. 

2 An old-age savings fund has also been established in connection with the 
savings bank. It may be participated in by any depositor in the savings bank, not 
over forty-five, who belongs to the class of lower officials, trade and industrial 
assistants, laborers, servants living in Frankfort or working there the greater part 
of the year. The yearly income must not, however, exceed 2000 m. When a 
depositor has saved 100 m., for example, one-half the interest payment may be 
credited to the old-age insurance fund, as a first payment. The savings bank 
contributes an additional sum (100 per cent of late years) and further pays interest 
on the account at a higher rate than is usual. Nevertheless, the savings have 
hitherto been very small. 

3 O. Most, Die Schuldenwirtschaft der deutschen Stadte. Jena, 1909. 



REVENUES FROM PUBLIC INDUSTRIES 1 77 

great extent a partner to this questionable practice, as the latest 
list of its security holdings does not include city bonds. It has, 
however, recently (1910) made a 3,000,000 m. loan to the city, 
which has been used to purchase shares of the Frankfort Gas 
Company. This loan has taken the form of a funded debt, in- 
terest payments at 4 per cent, and amortization payments at the 
rate of 2 per cent. 

The bank is undoubtedly an important instrument in further- 
ing the efforts which the city so vigorously makes to increase 
the facilities for cheap and comfortable living. On March 31, 
191 1, it had investments in mortgages amounting to 10,946,000 m., 
bringing in an average return of 4.2 per cent. It is stated that, 
as usual, the policy followed involved primarily a preference of 
those lots having the smaller dwelling houses. Among the se- 
curities, too (Wertpapiere), amounting to 13,000,000 m., are 
mortgages of the Hellerhof and Franken-Allee building com- 
panies, totaling 825,000 m. These two companies are engaged 
in the erection of small dwellings, and it is the aim of the city 
to further the efforts of such building companies as far as pos- 
sible. Likewise, in pursuit of this same policy, loans on mortgage 
security were granted to various building associations to the 
amount of 1,105,000 m. 

The Department of Supplies (Materialienverwaltung) has 
charge of the ordering of building materials, provision of office 
supplies for the various departments, and purchase of the service 
uniforms of the employees of the street railway. In 1908 about 
1^28 firms were engaged in the delivery of materials, the purchases 
lamountlng to about 2,520,000 m. Under this department also 
comes the work of repairing tools, wagons, and other implements 
belonging to the city. In addition to inspectors and office em- 
ployees the department has about no to 120 laborers under its 
control.^ 

Although the municipal undertaking department has not yet 
been segregated from the general administration, it can properly 
be counted among the community enterprises which have just 
been briefly described. In 1908 Frankfort took over the manage- 
ment of city burials, all operations even to the provision of coffins 
being arranged for. In nine other German cities the undertaking 
business has been municipalized, in some cases to the exclusion 

^ Busch, Gemeindebetriebe. Cf. previous reference. 



1 78 SELECTED READINGS IN PUBLIC FINANCE 

of all private undertaking business. In Frankfort the transporta- 
tion of the corpses is undertaken by the city alone, but other 
services may be performed by private undertakers. The fees are 
graded with reference to the income of the respective families of 
the deceased and five different classifications are made, the pay- 
ment required of those families with incomes less than 1500 m. 
being only one-fifth of the sum charged in those cases where the 
income exceeds 7500 m. For the lowest grade, a further 50 per 
cent reduction is made in case four persons are dependent on 
the income in question. The returns are more than sufficient to 
meet outlays : 411,500 m. against an expense to the city of 388,- 
900 m. Of course no allowance is made for interest on the work- 
ing capital, in this case, as the department belongs to the general 
city administration. 

As Dr. Otto Most has pointed out, the so-called real-estate 
funds {Grundstiicksfonds) are rather to be regarded as furnish- 
ing working capital for a new branch of communal activity than 
as funds assembled for the purpose of introducing stability into 
the city finances. In many instances, notably in Frankfort, the 
municipalities have become dealers in real estate on an enormous 
scale, working with an extensive capital provided largely from 
the proceeds of bond issues. According to the Kommunales 
Jahrbuch,^ of 91 German cities with over 50,000 inhabitants, 
about 50 (in 1910) had established special funds to which city 
landed property, not serving any particular purpose, had been 
turned over. Not only do the cities hope thereby to obtain for 
themselves certain legitimate gains from the rise in real-estate 
values brought about by communal activity, but they also desire 
to prevent an undue increase in the price of building lots for 
smaller dwellings. They wish, furthermore, to control the dis- 
tribution of population, to relieve congestion, etc., to carry out 
city building plans with a minimum of friction. 

In Frankfort a Spezialkasse jur stddtischen Grundbesitz (Special 
Fund for City Landed Property) was formed in 1897 to take 
over the management of certain landed holdings previously ad- 
ministered by the Stadtkammerei, and also to carry out building 
plans for those sections of the city not yet laid out. To the fund 
were transferred all city lands in the unbuilt sections not already 
devoted to particular administrative purposes, as, for example, 
1 Kommunales Jahrbuch, 1911-12, p. 621. 



REVENUES FROM PUBLIC INDUSTRIES 179 

schools, cemeteries, etc. The land originally transferred covered 
an area of 955-9' acres and the holdings have been steadily in- 
creased by further transfers and by purchases until, April i, 191 1, 
the holdings amounted to 3621 acres, or over 10 per cent of the 
entire land area within the city limits. The land bought within 
the period 1897-1910 amounted to 3186.3 acres ; the sales during 
the same time, 1156 acres.^ The Spezialkasse was also intrusted 
with the acquisition of land for the purposes of the East Harbor 
project. These purchases, however, have now been completed, 
and the account closed. 

In addition to the real estate originally transferred (estimated 
value, 26,576,000 m.), the Spezialkasse was provided (1898) with 
working capital from the proceeds of a loan of 6,000,000 m. Since 
that time the operations of the department have been increased 
enormously : the estimated value of the land-holdings being 
placed at 1 14,461,000 m.^ and the total value of all property con- 
trolled, March 31, 1911, at 123,000,000 m. The Spezialkasse has 
built up a relatively huge indebtedness within the period in ques- 
tion. In addition to purchases made with funds representing the 
proceeds of sales, further sums have been provided by a loan of 
5.452,981 m, (1910) and a second loan of 15,241,772 m. (1910). 
There is, too, a large floating debt, representing balances owing 
for purchases made, amounting to 28,704,000 m.^ Over 35,000,- 
000 m. of the increase in the value of the land-holdings since 
1897 is finally assignable to the fact that sales made during the 
period brought in a sum exceeding the inventory values of the 
property by that amount. At present, therefore, the Spezialkasse 
has property with an estimated value of 123,000,000 m. against 
an indebtedness amounting to 58,791,000 m.* 

That the picture is not so cheerful as the statistics would make 
it appear, goes without saying. That real estate is worth what it 
happens to bring and that previous estimates are very largely 
matters of guess work, must be conceded. Furthermore, it is 
open to ask to what extent the large purchases made by the city 

1 Verwaltungsbericht, 1910-11, Stadtkammerei, Tabelle, 11. 

2 The property already built upon has a value of 6,400,000 m. ; land ready for 
building, 17,100,000 m. ; land shortly to be inclosed, 27,300,000 m.; agricultural 
land, 46,700,000 m. ; land held for public purposes, 13,200,000 m. 

3 Verwaltungsbericht : Rechner-Amt : Stadtische Schulden. 

* Property alienated during the period (1897-1910) for streets and other public 
purposes, 6,140,000 m. ; for schools, 5,250,000 m. in 1909. 



1 80 SELECTED READINGS IN PUBLIC FINANCE 

have influenced real-estate prices. And if the city, reversing its 
policy, begins to sell more than it buys, to what extent will that 
affect the inventoried values of its present holdings ? The con- 
viction is sometimes expressed that the policy of the city has 
made worse the conditions it was intended to improve, that its 
steady purchases have raised real-estate prices in general, and 
that living conditions have been made more difficult through the 
resultant higher rentals.^ It would need an intimate knowledge 
of local conditions to enable one to express an independent judg- 
ment on this point. One would need to gauge the force of the 
other factors that make for higher prices. Even the city officials 
concede, however, that real-estate prices have, to a certain extent, 
been raised through the city purchases. A rather extreme 
example in point is afforded by the purchases for the East Harbor 
account. The properties transferred by the city and the city 
foundations were taken over at the rate of 4.3 m. per qm. Private 
individuals were paid at the rate of 17 m. per qm., the plans of 
the city having, of course, become matters of public knowl- 
edge, and its position as bargainer therefore made difficult. The 
example is not conclusive — no doubt other reasons would ac- 
count for some part of the price difference. But it was cited by 
a local official in illustration of the difficulties with which the 
city had generally to contend in making land purchases. 

In view of the fact that the city owns lands covering an area 
equal to 46.3 per cent of the territory within the city limits — 
18.3 per cent exclusive of the forest^ — its dominant position in 
the real-estate market is assured, especially as other peculiar 
local conditions have further limited private speculation ; namely, 
the large land-holdings of rich private families who show no 

1 Frankfurter Zeitung^ 9 Januar 191 2. 

" In theory all sorts of miracles were to be anticipated from the communal land 
policy. It was believed speculation would be destroyed, and the community, assured 
of price dictation in the real-estate market, would be able to solve the problem of 
living. In practice the opposite has occurred. A stagnation in real estate has 
resulted and prices are higher than before. So it happens that on the one hand 
we are suffocated with a too great landed property, while on the other hand, we 
suffer from a dearth of dwelling accommodations." 

2 For statistics upon which these computations are based, cf. Stadtkammerei, 
Sonderabdruck, pp. 10 and 23. 

It should be said that a relatively small proportion of the'^e holdings are still 
outside the city limits. 



REVENUES FROM PUBLIC INDUSTRIES i8i 

desire to sell. And in the case of smaller holdings, there exists a 
diffused ownership of scattered parcels, that could only be 
brought with difficulty under the ownership of a single person, 
and seldom on favorable terms. 

Another important point for consideration is the ability of 
such a special fund to meet outlays, including interest and 
amortization payments on its indebtedness, without recourse to 
fresh loans or demands on the taxpayers. As a matter of fact, 
the Spezialkasse has been unable to do so — the income having 
fallen behind the expenses and necessitating a loan of 3,865,500 m. 
(1910-11). For 1911-12 and 1912-13 loans to meet deficits are 
estimated at 4,244,460 m. and 3,210,000 m. respectively.^ Of 
course it is hoped that present deficits will be more than com- 
pensated by future advantageous sales. But, nevertheless, such 
a progressive debt increase, especially after it has attained such 
large absolute proportions, is not to be regarded with entire 
equanimity. The speculative risk involved has to be considered. 
As Professor Stein, Stadtrat in Frankfort, speaking anent the sub- 
ject of the real-estate operations of public corporate bodies, puts 
it : *' Landed property is not only to a great degree non-liquid. It 
has (as the returns from tenants hardly come here into question) 
the unpleasant characteristic of secretly devouring interest on the 
capital investment. The growing interest can . . . swallow up 
profits and can force the communities sooner than one would be- 
lieve, despite the foundation on a loan basis, either to withdraw 
sums from the regular income sources, thereby burdening the 
present generation whom it was hoped to spare, or else to sell their 
property. Easily, then, under stress of financial pressure comes a 
disposition to sell at great sacrifices. . . . The first principle of 
communal land policy must be to sell in order to purchase, to sell 
in order to keep the building activity at a steady pace, reflecting 
the growth of population and the extension of the city."^ 

Through the medium of another special fund, the Erbaudar- 
lehenskasse, the city makes loans for buildings to be erected on 
city property.^ The land is secured as a rule for. a period of 

1 Haushaltsplan, 1912-13, p. 530. 

2 Die offentlichen Korperschaften als Terrainuntemehmer in der Bodenfrage, 
Stadtrat Prof. Dr. Stein, F. a. M., Vortrag, Leipzig, June, 191 1, Wohnungskongresa. 

3 Vergebung stadtisches Gelandes im Erbaurecht (1901), Normalbestim- 
mungen. Cf. Biirgerbuch. 



1 82 SELECTED READINGS IN PUBLIC FINANCE 

sixty-one years for a yearly interest payment of about 2^ per 
cent of the land value. Then sums to cover the costs of building 

are loaned to 75 per cent of the entire costs (90 per cent in the 
case of city employees and teachers, for single-family houses) 
at an interest rate of 4 per cent, usually. At the end of the period 
for which the contract is made, the property again reverts to the 
city, which meantime holds mortgages on the buildings erected. 
Up to April I, 191 1, 139 contracts had been concluded : 13 with 
building associations, 102 with public of¥lcials and teachers, and 
24 with private persons.^ The entire sum loaned for building 
purposes amounted to 4,778,000 m., the working capital being 
provided from the proceeds of a city loan (400,000 m.) and 
through sums obtained from the city savings bank, the Spezial- 
kasse (loan of 3,236,000 m.) and a widows' insurance fund. The 
Erbaudarlehenskasse has also invested in the shares of two 
building companies engaged in the construction of small dwell- 
ings. As a result of operations in 1910-11, a very small balance 
was achieved in addition to the payment of interest on the work- 
ing capital, and amortization payments on the loan. 

The Strassenneubaukasse^ (fund for the construction of new 
streets), founded in 1893, has charge of the construction of new, 
and the broadening of existing, streets in the older city district. 
Here a great work has been accomplished in the tearing down 
of unsanitary buildings, and in the opening up of congested dis- 
tricts. The costs of the project have been defrayed out of loans 
obtained from the city, the total outstanding indebtedness (in- 
cluding balances owing of 3,308,600 m.) amounting to 24,886,- 
000 m. (April i, 1911). In addition a fixed sum from ordinary 
income is transferred by the city to the account of this fund, 
170,000 m., and the returns from the transfer tax to i^ per cent 
of the purchase price of the property sold.^ There is also a cer- 
tain amount of income obtained from rents, sales of property, 
etc., for, after the building plans had been completed, the fund 
was left in control of real estate valued at more than 19,000,000 m. 
Some of the property is built upon, and is temporarily rented, 
although it is designed eventually to tear down many of these 

1 Stadtkamtnerei, pp. 7 and 20, Sonderabdruck. 

2 Cf. Biirgerbuch, Spezialkasse zur Durchfuhrung neuer Strassenzuge in der 
Altstadt (1893). 

3 Stadtkammerei, Sonderabdruck, pp. 21, 22. 



REVENUES FROM PUBLIC INDUSTRIES 183 

buildings as unfit. Meanwhile, an unbuilt area of nearly 7 acres, 
value 11,341,000 m., has yet to be disposed of, and its utilization 
presents a sufficiently difficult problem for the present. Much 
of this property was destined for business purposes, shops, etc., 
as it is in an unsuitable location for dwellings. But the shop- 
keepers, too, are moving farther west, and only in a few instances 
has the land been taken up. The city has begun slowly to build 
on its own account, but the outlook is not extraordinarily favor- 
able and no' easy task is anticipated.^ 

Although as an independent fund the Strassenneubaukasse is 
charged with interest and amortization payments on its debt, it 
is not to be expected that it should be self-supporting. In addi- 
tion to the current transfers already mentioned, a further deficit, 
835,000 m., was met from the proceeds of loans, 1910-11, and 
further deficits are similarly provided for in I9ii-I2and 1912-13.^ 

The Allgemeine Grundbesitzverwaltung or Stadtkdmmerei (Gen- 
eral Administration of Landed Properties) is managed as a 
branch of the general city administration, although it, too, might 
very well have been made into a separate department. In addi- 
tion to having control of the administrative and other public 
buildings, the department has under its supervision rented build- 
ings valued at over 30,000,000 m. Some idea of the importance 
of the city as a landlord is to be had, if it be mentioned that, in 
1908, 269 apartments were rented out to city employees at rentals 
about 30 per cent below the normal price for similar accommoda- 
tions.^ The returns are not given separately and it is unfortu- 
nately impossible to estimate the interest received on the capital 
invested in these buildings. ■ However, the results for one model 
apartment house recently built in the suburb of Bockenheim have 
been obtained. The building cost 300,000 m., the land is valued 
at 104,310 m., the rentals amount to 21,500 m. Deducting 20 per 
cent of that amount for repairs and general upkeep, the interest 
on the capital investment amounts to 4 per cent. In 1907-08, the 
last year for which comparative statistics were available, the 
rentals from city-owned dwelling houses alone were stated to 
amount to 820,200 m., very, nearly twice as much as the returns 
for Munich, the city of next importance in this respect. 

1 [Statement Oberbiirgermeister Adickes.] 

2 Haushaltsplan, 19 12-13, P- 524- 

3 Busch, Gemeindebetriebe, authority for this statement. 



I84 SELECTED READINGS IN PUBLIC FINANCE 

The city forest, a large part of which was acquired in the four- 
teenth century, is also under the control of the Stadtkammerei. It 
covers an area of 8459 a. (mostly wooded), and the returns, ob- 
tained largely from the sale of lumber, bring in a net income 
of 153,250 m.^ 

There has next to be considered an extraordinary source of 
income without which a vast number of communal activities 
could never be developed ; namely, the sums obtained from 
loans which generally take the form of bond issues. Contem- 
plated communal loans must, as has been previously stated, re- 
ceive the approval of the central government, and judging from 
the heavy indebtedness of the local political units, that approval 
has not been difficult to secure in the past. For the future, how- 
ever, as a result of the rapidly increasing debt-burden, the super- 
vising authorities have determined upon a severer policy. It has 
also been decided to raise the amortization quotas ; the repayment 
of loans contracted for so-called unproductive purposes must 
be provided for at the rate oi 1%. per cent at the very least, and 
for the productive loans 2 per cent is the lower limit. 

Frankfort has an extraordinarily large debt for a city of its 
size — somewhat over 288,000,000 m. for a population of 414,576, 
of which 234,562,800 m. represents the funded debt.^ The rest 
is largely outstanding balances and mortgage indebtedness of 
the general administration for city lands and of the Spezialkasse. 
This very large unfunded debt is peculiar to Frankfort, as in 
other municipalities the amount of the floating debts is quite un- 
important. In 1907, when the city had a debt of 222,947,700 m. 
(population 355,312), the per capita indebtedness, 627 m., was 
far greater than that of any other German city, Freiburg fol- 
lowing with 527 m., Charlottenburg, 484 m., Weisbaden, 463 m., 
and Munich, 431 m.^ Since that time the per capita indebtedness 
has risen to 694m. (1911), despite the incorporation of suburbs 
materially increasing the population of the city (in April, 1910).* 



1 Verwaltungsbericht and Haushaltsplan. 

2 Cf. Verwaltungsbericht, 1910-11 (Rechner-Amt) and also Haushaltsplan. 

3 Pfitzner, pp. 8 ff. Statistics include unfunded as well as funded debt. 

* In 191 1 a further special loan (not yet issued, however) was authorized for 
land purchases to the amount of 32,500,000 m. 

The prospective funded debt as estimated for March 31, 191 2 : 241,673,000 m. 



I 



REVENUES FROM PUBLIC INDUSTRIES 185 

The wealthier the city, the easier the terms upon which loans 
can be obtained, and the more heavily, therefore, can it afford 
to draw upon its credit resources. That Frankfort has taken ad- 
vantage of its excellent repute as a borrower to spare its tax- 
payers is evident from the fact that other cities with well- 
developed municipal activities of a similar sort, and with higher 
tax rates, have a smaller per capita indebtedness. The question, 
however, as to whether a corporate body is or is not heavily debt- 
burdened depends after all upon the disposition which has been 
made of the proceeds of the loans obtained. When these sums 
have been invested in such a way that the interest and the re- 
quired amortization payments can be met (not to mention the 
cases in which net surpluses are returned), the debt is, of course, 
no burden and may be a source of additional income. According 
to the ofKcial statistics, the funded debt of Frankfort to the 
amount of 171,866,000 m. is so invested that it can be drawn on 
to meet the interest and amortization payments on the loans in 
question, leaving an unproductive debt of 62,696,000 m.^ for 
which interest and amortization payments amounting to 3,328,- 
000 m. have to be met out of current income.^ The statement, 
though formally correct, is misleading, for in certain cases what 
is taken from one pocket is, so to speak, merely transferred to 
another. The Spezialkasse, for example, though responsible for 
interest and amortization payments on its large funded debt, has 
recurrent deficits in excess of these sums, which have to be met 
by loans. The Strassenneubaukasse likewise receives annual 
dotations in excess of the sums for which it is debited for in- 
terest and amortization payments. Of the 121,465,000 m. of the 
funded loan invested in communal undertakings (Gemeindebe- 
triebe) not all is so placed that interest and amortization pay- 
ments as well as all other expenses can be covered. The case of 
the East Harbor, for example, has been discussed. No doubt it 
will some day prove a productive investment, but for the present 
it is not so. A number of other undertakings are likewise not 
entirely self-supporting, it will be remembered, although in gen- 
eral it can be said that these are rather unimportant exceptions 

1 Of this sum, 3,676,300 m. had not been issued up to March 31, 191 1. Its issue 
was contemplated, however, during the ensuing year. 

2 Rechner-Amt, p. 34, Sonderabdruck. 



1 86 SELECTED READINGS IN PUBLIC FINANCE 

to the rule.^ Of the remaining funded debt, a large part, nearly 
38,000,000 m., was incurred for the construction of administrative 
buildings, public schools, hospitals, almshouses, museums, and 
churches. The cemeteries, with a capital indebtedness of 2,755,- 
000 m., bring in substantial returns, and the debts incurred for 
the building of houses to be rented, 3,402,000 m., included under 
the general administration, are productively invested, although 
it is unlikely that amortization as well as interest payments could 
be covered by the returns. 

The percentage distributions of the funded debt as computed 
from statistics given in the latest Verwaltungsbericht are rather 
interesting, although for comparative purposes they are not as 
illuminating as might be expected, especially in the case of the 
communal industries. The amount of the indebtedness of the 
latter depends very much upon the date of the establishment of 
the industry. The statistics are, however, given for what they 
are worth. On April i, 191 1, the water works accounted for 11.3 
per cent of the funded debt; the electricity works were respon- 
sible for 7.3 per cent ; the street railway, 8.4 per cent ; canaliza- 
tion, 4.7 per cent ; and slaughter house and stock yards, 3.36 per 
cent. The debt resting on the harbors was naturally large, be- 
cause of the recently incurred outlay for the East Harbor — over 
17.7 per cent. The debts incurred for "city building," the carry- 
ing through of new streets, and the rebuilding of old ones 
(excluding the operations of the Spezialkasse) were also very 
large — 12 per cent of the total. The funded debt of the Spezial- 
kasse, together with the debts incurred by the general adminis- 
tration for land purchases, reached 19 per cent (to say nothing 
of the very large unfunded debt). The expenditures for school 
buildings constituted 7.1 per cent of the public debt ; for admin- 
istration buildings, 3.5 per cent; for almshouses and hospitals, 
3.2 per cent. 

It is not to be denied that the "unproductive debt," using the 
term in the narrow business sense, is absolutely large, and that, 
furthermore, some part of the expenditures, especially those in- 

1 The advance to the canalization department is insignificant. The gas works 
of Heddernheim would more than meet interest payments without a dotation. The 
Verbindungs- und Hafenbahn, however, receives an advance nearly equal in amount 
to the interest and amortization payments. The bathing establishments require an 
advance exceeding the amount of the interest and amortization payments. 



REVENUES FROM PUBLIC INDUSTRIES 187 

curred for building operations, might better have been met out of 
current income or out of funds built up by regular annual con- 
tributions. For such expenditures, though extraordinary in one 
sense of the word, are, as a matter of fact, recurrent in the sense 
that in grov/ingand progressive communities similar outlays have 
to be periodically made, and can be confidently anticipated. If 
the city wishes to avoid steadily increasing its debt, other sources 
of revenue must be found for some of these expenditures. The 
existing provisions for amortization, although leading to a more 
rapid extinction of the debt than is usual in many cities, never- 
theless hold out no present hopes that the cancellation of existing 
debts is likely to proceed pari passu with the creation of new 
ones.^ In 1910-11, the last year for w^hich full statistics are 
available, over 17,641,000 m. in new loans was issued, the pro- 
ceeds to the amount of 10,493,000 m. going to the municipal in- 
dustries ; 3,865,500 m. to the Spezialkasse ; the rest for various 
purposes. During the year in question, amortization payments 
did not quite amount to 4,900,000 m. During the past year a loan 
increase of over 16,000,000 m. had as offset amortization pay- 
ments amounting to 5,538,000 m. However excellent its standing, 
a city cannot indefinitely increase its obligations„ Indeed, the 
extensive exploitation of their credit on the part of the German 
municipalities brings a complaint from the cities themselves that 
capital is increasingly difficult to obtain, the general rate of in- 
terest now being 4 per cent, whereas earlier 3^ per cent was 
usual. ^ On the other hand, the business world at large sees in 
the municipalities dangerous competitors for the capital desired 
to further the expanding industrial and commercial interests of 
the country.^ - 

Frankfort has established a number of special building funds 

1 Cf. Verwaltungsbericht. The amortization rates for the earlier loans, i per 
cent, have been raised of late years, usually to i| per cent, more lately to 2 per cent, 
and for a special loan for land purchases, 1907, to 3I per cent. 

2 Naturally other more general causes have influenced the rise in interest rates. 
^ Frankfort maintains a city debt registry {Schuldbuch). On the relinquishment 

of the city securities held by investors, the city will take charge of interest payments, 
etc. A small fee, 50 pf ., is required for each 1 000 m. The payment of interest follows 
either directly or through payment into savings accounts, the Reichsbank, post- 
office or other designated depository. Strict secrecy is observed concerning the 
amount of individual investments. At the end of March, 191 1, 954 accounts with 
over 31,000,000 m. were recorded. 



i88 SELECTED READINGS IN PUBLIC FINANCE 

which are designed to provide the means of defraying construc- 
tion costs without constant recourse to loan issues. If this pohcy 
continues to be vigorously pursued, some part of the "unpro- 
ductive" debt can for the future be kept within bounds if not 
actually reduced in amount. The general building fund, for 
example (Allgemeine Baujonds), and the building fund for the 
common {Volks-) and middle schools, receive dotations from 
ordinary current revenues exclusively : 6y2,'^6^ m. and 1,500,- 
000 m. respectively in 1910-11.^ On the other hand, the hospital 
building fund {Krankcnhausbaufonds) and the building fund 
for continuation, trade, and higher schools {Baujonds fur Fort- 
bildungs-f gewerbliche und hohere Schulen), although receiving 
sums obtained from ordinary sources of revenue (aus dem Or- 
dinarium), depend for the most part upon the proceeds of loan 
issues. The former fund, for example, 1910-11, received 1,287,- 
450 m. from loans, and only 211,180m. from the ''Ordinarium" ; 
the latter fund obtained 3,286,900 m. (loans) and 572,365 m. 
(Ordinarium).^ Among the minor funds, the Fund for Public 
Improvement and Education {V olksbildungsjonds) and the Fund 
for the Furtherance of Trade, Art, and Science also receive small 
yearly dotations, fixed at 100,000 m. and 150,000 m. respectively. 
Another very important fund is the renewal and reserve fund 
{Erneuerungs- und Reservefonds) belonging to the communal in- 
dustries. As a result of financial need, the fund has lately been 
less well endowed, in some cases no transfers whatever being 
made to this account. The result is that the size of the fund as 
estimated in 1912 (9,702,000 m.) is less than it was April 1, 1911 
(9,988,000 m.),^ and still less than three years prior to that time 
when it amounted to 10,100,000 m. The falling off in the renewal 
funds is matter for serious comment. Where such funds are 
insufficient, the evil effects upon the city finances are plain : 
either an unusually heavy drain upon current revenues to meet 
a suddenly increased need, or else fresh loans to meet expendi- 
tures that should have been defrayed out of income. The other 
alternative, depreciation of the existing capital investment, would 
mean an economic loss out of all proportion to any slight mone- 
tary saving. As to whether or not the fund is at present ade- 
quate is a matter for expert decision. As the magistracy states 

1 Haushaltsplan, 1912-13, pp. 69-540. 

2 Idt'd. 3 Cf. " Anmerkungen," p. 540, Haushaltsplan, 191 2-13. 



REVENUES FROM PUBLIC INDUSTRIES 1 89 

in a preface to the provisional city budget for 1912-13: "It re- 
mains to be seen in the course of the following! year, to what 
extent the amount of these sums stands in agreement with the 
amount written off for depreciation on the investment capital, 
taking into consideration the amount of the loan capital actually 
repaid. For the time being a further weakening of this reserve 
is not to be recommended." In the same preface it is also said : 
"In the case of the management of particular undertakings, a re- 
duction of the originally contemplated, calculated transfers to the 
renewal funds has already taken place. In the case of the elec- 
tricity plant, whose renewal funds show a falling off against 1907, 
no transfers are made. The same is true of the water works. To 
the renewal fund of the street-car system, which, despite the open- 
ing up of many new lines, is less than it was in 1907, are only made 
good those expenditures which have been defrayed out of it."^ 

Lastly to the Equalization Fund (Ausgleichsfonds) are trans- 
ferred unexpected surpluses, while from it unforeseen deficits are 
met. The fund has, however, suffered the natural fate of such 
institutions, and, as a result of having been turned to account to 
meet anticipated instead of accidental deficits, it has declined 
almost to the vanishing point. 

Of the 25,567,000 m. required to meet the ordinary financial 
needs of the general city administration, 21,255,000 m. was cov- 
ered by taxes (1910-11), while 3,617,000 m. represented balances 
turned over by the communal undertakings.^ The ordinary ex- 
penditures can only be briefly enumerated, for any one branch of 
the general administration affords in itself material for an ex- 
tensive study. The expense incurred for schools is by far the 
most important single item, as is usually the case in the larger 
cities : 7,422,000 m. (including sums transferred to the building 
funds). Next in importance come the expenditures for poor re- 
lief, hospitals, and philanthropic undertakings, the advances 
amounting to over 3,800,000 m. The Tiefbauamt, which has 
charge of street inspection, street cleaning, bridges, etc., required 
a sum of 3,120,000 m. (1910-11), and the Hochbauamt, which 

1 Entwurf des Haushaltsplanes der Stadt, 191 2- 13. Vortrag betr, den Haus- 
haltsplan fur das Rechnungsjahr, 191 2. 

2 Approximately 550,000 m. was contributed by the Grundbesitzverwaltung and 
the Cemetery management. The total receipts from all sources, 1910-11, were 
50,910,000 m. ; the total expenditures, 50,818,000 m. 



I90 SELECTED READINGS IN PUBLIC FINANCE 

includes the fire department, building inspection, city gardening, 
is next in importance with 2,198,000 m/ Of late years the ex- 
penditures for schools, police, sick and poor relief have increased 
enormously. Between 1895 and 1910 the increase for schools 
amounted to 309.98 per cent ; for police, 282 per cent ; for poor 
relief, 280.94 per cent; for hospitals, 405.67 per cent. The pro- 
ceeds of the income tax, on the other hand, from which these 
expenses are, in general, to be met have only risen 194.4 per cent 
during the same period, although the tax rate has been increased 
42.8 per cent. 

Considering the variety and extent of the municipal activities 
of the city, the amount demanded in taxes is not great : 24,563,- 
000 m. for a population of 414,576 (1910-11). It needs to be 
remembered, however, that the sum is considerably greater for 
German conditions than it would be for American, and it gives, 
furthermore, in all probability, the largest per capita taxation 
(59.2 m.) for the whole of Germany.^ On the other hand, these 
statistics afford no good idea of the relative burden of taxation, 
as the wealth of Frankfort enables it to secure more liberal re- 
turns from persons of large income and from the propertied 
classes to the disburdening of the poorer elements. 

The policy which is being pursued at present is so markedly 
one of expansion — ever increasing taxation, and ever growing 
indebtedness — that, although the city has much to show for its 
efforts, on the one hand, it will take time to find out how much 
it has to pay, on the other hand. Upon the success or failure of 
its land policy, and of its great harbor scheme, a vast deal de- 
pends. If the large indebtedness incurred on these accounts 
proves to have been wisely contracted, the city may be proud. 
Meantime fresh loan issues defer the day of reckoning. 

1 The statistics given are based on the estimates foripio-ii. They do not 
represent the total expenditures of the several departments, but the uncovered 
expenditures which have to be met from the current income of the city. 

2 Statistisches Jahrbuch deutscher Stadte, 17. Jahrgang, p. 362. In 1907-08, 
Frankfort, with a/^r capita tax of 54.75 m., led the 80 German cities for which 
statistics were given. 



CHAPTER VII 

FEES 

26. The Nature of Fees : Eheberg's Views. — Ever since the 
time of Rau ^ most writers have treated fees as a distinct branch 
of public revenue. There has been, however, no general agree- 
ment concerning the precise definition of a fee. Rau himself 
gave the following definition : ^ 

Fees are charged upon occasions when the citizen comes into 
contact with the government or some of its agencies. They can 
be considered a special compensation for the expenditure which 
the particular act of government occasions, and so far resemble 
a payment made for a service rendered by a private person. 
But on the other hand, the governmental institution which gives 
occasion for the collection of a fee is not conducted for the 
purpose of obtaining such dues ; on the contrary, it arises from 
the duty of the state to seize upon all expedient means of ful- 
filling its purposes." ^ 

^ Even before Rau, however, Adam Smith had recognized the existence of fees. 
Smith said, for instance : 

" The expense of the administration of justice, too, may, no doubt, be considered 
as laid out for the benefit of the whole society. There is no impropriety, therefore, 
in its being defrayed by the general contribution of the whole society. The persons, 
however, who give occasion to this expense are those who, by their injustice in one 
way and another, make it necessary to seek redress or protection from the courts of 
justice. The persons, again, most immediately benefited by this expense are those 
whom the courts of justice either restore to their rights or maintain in their rights. 
The expense of the administration of justice, therefore, may very properly be defrayed 
by the particular contribution of the one or other, or both of those different sets of 
persons, according as different occasions may require, that is, by the fees of court." 
Wealth of Nations, Bk. V, ch. i. 

2 Finanzwissenschaft, § 227. 

3 With this definition we should compare other more recent ones. Roscher says 
that fees are " payments made for individual acts of government, by those persons 
who have been the direct occasion of the action." Finanzwissenschaft, § 22. Wagner 



192 SELECTED READINGS IN PUBLIC FINANCE 

The following account of the nature of fees is from a repre- 
sentative German writer. K. T. Eheberg : ^ 

Fees are special charges fixed by the state for special 
demands upon public officials or institutions, and are paid by 
the persons who have occasioned these demands for the services 
or action of the government. Accordingly the distinguishing 
characteristic of the fee, that which differentiates it from a tax, 
is the fact that a fee is collected in connection with some defi- 
nite action of public agents and as compensation therefor. 

Fees arise only in connection with such public institutions and 
officials as are maintained for the sake of the general public 
welfare in order to secure essential public ends. These institu- 
tions would have to be maintained in any case even if their 
services were seldom needed, but their action is occasioned by 
the demands of particular persons. The occasion for the 
demands, and therefore for the payment of a fee, may be of two 
sorts : either the individual calls for the intervention of the 
public agencies in cases where his personal interest is the same 
as that of the public, or he seeks in his own interest to obtain 
special privileges. The first case arises, for example, in con- 
nection with many of the fees for administering justice or 
inspecting weights and measures ; the second arises where the 
individual obtains special advantages through exemption from 
legal regulations or special concessions, such as patent rights 
and similar privileges. In all these cases the institution itself, 
which serves partly public and partly private ends, is maintained 
wholly or partly at public expense; but the cost of the individual 
acts is defrayed more conveniently, in whole or in part, by fees 
collected from those who have occasioned the expense. 

From these remarks we can deduce the leading principle for 

says : " Fees are charges, arbitrarily fixed by a government in amount and method 
of payment, which individuals or groups of individuals pay as a special compensation 
for some service rendered by a public body, or for some expense which the individ- 
uals have caused the state in the exercise of its functions." Finanzwissenschaft, 
§ 277. And Seligman gives the following definition : "A fee is a payment to de- 
fray the cost of each recurring service undertaken by the government primarily in 
the public interest, but conferring a measurable special advantage on the fee-payer." 
Essays in Taxation, 304. 

^ Finanzwissenschaft, §§ 71-73. 



FEES 193 

determining the amount of a fee. In the first case just described, 
the expense which the individual has occasioned should be the 
basis for determining the sum charged him ; in the second case, 
the measure of the fee should be the value of the privilege which 
is accorded him. In this measurement it is necessary to con- 
sider how great the public interest is in the service or act per- 
formed. The greater the public interest in the particular branch 
of administration, the lower should be the fees charged there- 
for ; the smaller the public interest, the higher the fees ought 
to be. For this reason fees are fixed according to the value of 
the service, when special legal advantages are granted or an 
exception is made in the application of a general law. 

On account of the varied nature of fees it happens, to be 
sure, that these two principles for measuring their amount 'pass 
over into one another. And since the actual adjustment of fees 
in different countries is materially affected by historical condi- 
tions and by the other public charges, we can in practice demand 
no more than that the principle just laid down shall be generally 
followed. In general we can say merely that, as a rule, charges 
should be no higher than is necessary to meet the average cost 
of running the office concerned, and that in particular cases the 
fee may be above or below this average level. 

It is contrary to the nature of a fee that the ability of the 
particular contributor should be considered in determining the 
amount. That does not prevent us from exempting persons 
from fees in case of poverty, or straitened circumstances com- 
bined with special merit, in order to secure even to the poor the 
benefit of public institutions, such as courts of justice and 
schools. Exemption from the fee in the first case is charity ; in 
the second a reward, bestowed upon persons without means at 
the expense of those better circumstanced. 

By the characteristics above mentioned fees can be, at least 
in theory, sharply separated from all other forms of income. 
They are distinguished from the economic income of the state 
by the fact that, with economic income, the use of and resort to 
the services of the state is free and the price is governed by 
competition ; while with the fee the state, by its power of com- 
pulsion, obliges the individual to resort to public agencies and 
fixes arbitrarily the payment made therefor. And they are dis- 



194 SELECTED READINGS IN PUBLIC FINANCE 

tinguished from taxes by the fact that, with fees, the ruling 
principle is special payment for special service, of special reck- 
oning in each case between the- treasury and the contributors ; 
while, with taxes, the ruling principle is general contributions 
for general services, that is, general contributions for the expense 
of maintaining order and promoting the welfare and culture of 
the people. If the duty to pay taxes follows from the fact of 
membership in the state, the duty of paying fees arises only as 
a result of making a special demand upon public institutions. 

Of course in practice taxes and fees easily pass over into one 
another. Not infrequently charges known as fees are so high 
that there is no relation between the cost of service and the 
charges in question. Also occasionally charges which are noth- 
ing but taxes are called fees, either as a result of their historical 
relations or because they are actually associated with fees. That 
is true particularly of duties upon the transfer of property, for 
this transfer not only is attended with fees, since it requires 
some action by public officials, but it gives occasion many times 
for the imposition of taxes. 

27. The Fee System of our Federal Government. — Professor 
T. K. Urdahl, in his detailed study of the fee system in the 
United States, gives the following account ^ of the fees collected 
by the federal government : 

A. Patent and Copyright Fees 

To the public generally the best-known system of fees col- 
lected under the federal laws is undoubtedly that connected 
with the National Patent Office. This office is one of the insti- 
tutions which were conceived and established by Jefferson in 
1790. Before that date some of the states had by legislative 
acts granted copyrights and patents for short periods of years, 
but none of them had any complete system. True to the ideas 
then current, that fees should pay salaries directly, and should 
only be sufficient to make the public institutions self-supporting, 

^ Reprinted, by permission of the author, from The Fee System in the United 
States, pp. 141-147. Published in the Transactions of the Vvisconsin Academy of 
Sciences, Vol. XII (1898). 



FEES 195 

Jefferson made the patent-office fees very low, and allowed all 
of them to be collected as salaries by the patent-office officials. 
But the receipts were found to be inadequate to pay expenses ; 
so in 1793 a law was passed which increased the fees to six times 
the former amount. This continued in force up to 1836, when 
a new act was passed which provided that patent officials should 
be paid salaries, and that all the fees collected should be paid 
into the treasury. The patent-office fees remained about the 
same for United States citizens, but foreign applicants were 
compelled to pay much larger sums for patent rights. Provision 
was also made for the right to extend the life of a patent, and 
a fee of ^40 was to be collected for each extension. This 
schedule remained in force up to 1861. Congress then passed 
an act which reduced most of the old fees by one half, but en- 
larged the fee bill so as to require payments for official acts 
which up to that time had been free. The discriminations 
against foreigners were also repealed. 

With slight changes this schedule has remained in force up 
to the present. New duties are gradually taken over by the 
patent office, because the sphere of invention becomes broader 
with every new discovery in science, and the technicalities of 
patents and patent rights become more complicated. New fees 
are therefore constantly being introduced to pay for the more 
elaborate and thorough examination which must be taken in the 
interest of the patentees. 

The copyright law has been subject to less change than the 
patent law, and the fees have remained uniform almost from the 
beginning. The first act, passed in 1790, fixed the copyright fee 
at 50 cents, and provided for a reissue on payment of another 
fee of the same amount. These charges continued unchanged 
in all the subsequent acts, except that a recent law has taken all 
the fees out of the librarian's salary and required their pay- 
ment into the treasury.^ 

1 The applicant for a copyright is required to deposit two copies of his book with 
the librarian, the cost of which may in one sense be reckoned as a part of the copy- 
right fee. There are, however, other fees collected by the librarian, which are not 
absolutely necessary to the validity of the copyright. As such may be mentioned a 
fee of 50 cents for each copy of the certificate, and one of ^i for recording the 
assignment of a copyright. 



196 SELECTED READINGS IN PUBLIC FINANCE 

B. Custom-house and Other Import Fees 

The very first law levying import and tonnage duties made 
provision for the payment of all officers connected with the cus- 
tomhouse, by means of fees. Surveyors, weighers, gangers, 
inspectors, and collectors, each had their own fees defined by 
this early act of 1789. Clearance and entrance fees for ships 
were varied according to the tonnage. For ships of less than 
100 tons, the fee was ;^i.5o, while all ships of over 100 tons 
were required to pay $2. Payments were also made for per- 
mits to land goods and for each bond procured. In 1789 the 
coasting and fishing trades were put under special regulation 
by means of licenses, for each of which a fee of 50 cents was 
collected; and in addition a fee of ;^io was charged for each 
certificate of enrollment. Foreign vessels were placed under 
similar restrictions and compelled to pay for any privileges 
granted them. This schedule of fees continued in force for two 
decades, when it was decided to vary the amount according to 
the importance of the port of entry, and a salary was added to 
the fees of office in some of the Northern and Northwestern 
ports. A decade later, in 183 1, an act was passed which 
required all the fees collected in the Northern customhouses to 
be paid into the treasury, and placed the customs officials of that 
section on a salary. Up to 1864 most customhouse officials of 
the Atlantic seaboard received as compensation all the fees col- 
lected at their respective offices. The enormous sums which 
some of these positions yielded finally became known, and as 
a result Congress passed an act making $9500 the maximum 
amount which any collector should be allowed to retain, and pro- 
viding that any excess above this amount should be paid into the 
treasury. These provisions, however, did not prove satisfactory. 
So in 1879 a new law was enacted which provided a schedule of 
fees to be exacted from all who had dealings with the customs 
service. These multitudes of fees, consisting usually in small, 
vexatious exactions, were in many cases inadequate to compen- 
sate the officers concerned, except in the busy ports, where they 
aggregated enormous sums. One of the sections of the last- 
named act provided fixed salaries for naval officers, collectors, 
and surveyors of the chief ports. There was no reason why this 



FEES 197 

provision should not have been extended to all the other officers 
connected with the customs service, especially since action to 
this effect had been repeatedly recommended by the secretaries 
of the treasury. 

The tariff of 1890, known as the McKinley bill, abolished all 
fees exacted for oaths except so far as provided in the act itself. 
It also placed all officers on salaries equal to the amount of 
fees which each would have been entitled to receive for his ser- 
vices during the year. This was a step in the right direction, 
but only a very small one, as the salaries were left just as inde- 
terminate and unclassified as ever. 

C. Licenses to Vessels 

In 1864 a new standard was adopted for estimating the fee 
or charge for each permit or license to vessels, in that the fee 
was made to vary from 25 cents to ;^i according to the ton- 
nage of the vessel. Fees for permits to vessels belonging to 
foreigners were fixed higher than those of citizens of the United 
States. Then came an act in 1871 fixing the license fee as 
^25 for a vessel of 100 tons burden, and charging 5 cents 
extra for each ton over that Hmit. The same change is notice- 
able in the fees which were allowed for measuring vessels. 
Similar standards are applied to boat-inspection fees. The 
first law on this subject was enacted in 1838, and fixed a fee of 
$^ for the inspection of any vessel, and the same for each 
boiler inspection. In 1852 vessels were divided according to 
tonnage into four classes ranging from 1000 tons to less than 
125, the fees varying from ^35 to $20. This schedule remained 
in force up to i884,^_when inspectors were paid salaries; and 
the fees, which were fixed at $10 for a vessel of less than 100 
tons and 15 cents extra for each additional ton, were collected 
for the treasury. 

D. Miscellaneous Maritime Fees 

Numerous other fees were from time to time collected for 
licenses to carry on maritime and other pursuits. Wreckers 
and pilots were compelled to obtain licenses at a cost of ;^5, 
besides a fee of ^i for each annual renewal of the same. In 



198 SELECTED READINGS IN PUBLIC FINANCE 

1864 this charge was increased to ^10 for each Hcense. A 
few years later the captains, mates, and engineers were placed 
under the same requirements. From 1872 shipping commis- 
sioners were allowed a fee of $2 for each man engaged by 
them for a crew, and 50 cents for each certified discharge. 
This law was modified in 1884 in such a way that all the fees 
of the shipping commissioners were required to be paid into the 
treasury. 

E. Court Fees 

Most of the inferior officers of the federal courts were, until 
quite recently, allowed to retain some or all of the fees con- 
nected with their respective offices ; nor had any serious attempt 
been made to reduce the income derived from fees to any fixed 
amount, until the act of 1853, by which the allowance of deputy 
marshals was limited to 75 per cent of the fees earned by them. 
This was followed by an act requiring marshals to give an 
account of all fees collected, which finally resulted in the act of 
1878 fixing the maximum compensation of United States mar- 
shals at $6000, to be paid out of the fees earned after the 
office expenses had been deducted. The clerks of the United 
States courts have continued to receive fees as salary down to 
the present ; and only slight changes have been made in the 
original bill regulating their fees, for the most part in increasing 
the number of acts for which fees might be collected. United 
States district attorneys have also received the fees collected for 
their services almost up to the present. It is only within the 
last year that these positions have become salaried. The terri- 
torial court officials still receive many fees for numerous services 
which are usually performed by other officers in the states. For 
example, fees for marriage licenses, recorders* fees, and the like 
are still received by them. 

F. Land-office Fees 

It is in the land office that we first see the government change 
from a fee system of compensation to a salary system. The 
prospect of gradually increasing government land sales made it 
evident that the fees in many offices would greatly exceed the 
legitimate compensation for the work performed ; and it was 



FEES 199 

equally evident that no adjustment of the schedules could bring 
about an equilibrium between work and pay. So, as early as 
1 8 18, we find an act which gave the land-office registers and 
receivers an annual salary of ;^i500, besides one per cent of 
the money collected by their respective offices; provided, how- 
ever, that no salary should exceed ^3000 per annum. But even 
this provision made a position in the land office of a rapidly 
growing state exceedingly desirable. Hence in 1859 another act 
was passed which limited the salary of registers and receivers to 
;^25oo in Western and ^3000 in Pacific states. The land-office 
fees constituted a very large part of the original price of the land. 
In the Pacific states the fees were 13 per cent of the total price, 
in some of the others they constituted 1 1 per cent, and in many 
cases even more. When the surveyors' fees are added to these, 
one can realize what an important item in the cost of the public 
land these fees were. It must be borne in mind also that the 
fees had to be paid, even though the land was obtained by pre- 
emption, by tree claim, or in any other manner. The land- 
office fees have at times been used by unscrupulous officials 
as instruments for carrying on some of the most notorious and 
fraudulent land swindles, to the injury of actual settlers. 

G. Miscellaneous Fees 

The consular and diplomatic offices collect each' year certain 
fees for passports, consular papers, and other services. Origi- 
nally these formed part of the salary of the consul or minister, 
as did the fees collected in the consular courts; but in 'i860 
these officials were required to account for all fees received in 
any way in the exercise of their judicial authority. Many of 
the fees were diminished in amount and some of them entirely 
abolished by the act of 1891. Postmasters were also paid origi- 
nally by means of fees ; and a remnant of ttie old system ex- 
ists even to-day, in the fact that the salary of postmasters in small 
towns depends upon the average receipts of their respective 
offices for the four years preceding. As far back as 1845 an 
attempt was made to limit the compensation of ^ese officials by 
an act which provided that none of them should retain more 
than ^5000 per year including his salary. Any excess should 



20C) SELECTED READINGS IN PUBLIC FINANCE 



be accounted for and paid into the treasury. This act was soon 
superseded by the present law. Other fees regulated from time 
to time by Congress are the municipal fees of all kinds in the 
District of Columbia. Fees for liquor licenses and for licenses 
to innkeepers, peddlers, and many other occupations, have been 
fixed and changed again and again by Congress. One act 
which illustrates very well the tendency of changing from fees 
to regular salaries is that of 1842, which expressly prohibits 
any police official in the District of Columbia from receiving 
any gift, fee, or emolument other than his regular salary.^ 

28. Some Typical Fees collected in American State and Local 
Governments. — Fees collected by authority of state or local laws 
are so numerous that only a few typical cases described by Pro- 
fessor Urdahl ^ can be given here : 

I. Fees for oil inspection. — First and foremost in importance 
is the inspection of oil or petroleum, if we may judge by the 
number of states which have deemed it necessary to enact com- 
pulsory oil-inspection laws. The oil-inspection legislation prob- 

1 Elsewhere (p. 191) the author says : 

" Federal fees are the only ones of which anything like complete accounts are kept, 
and even here the reports are not detailed enough to make an exhaustive treatment 
possible. A special report made by the Secretary of the Treasury to Congress, stating 
the receipts and expenditures of the federal government for the year 1882, is the 
basis of the following table, which contains the aggregate of all the fees, excluding 
postal fees, collected by federal officials of that year " : 



'Consular fees .... 






, ^613,422.22 


Steamboat fees 






. . 279.889.36 


Registers' and receivers' fees . 






. 1,107,671.61 


Marine hospitals 






. 406,103.59 


Weighing fees 






48,638.17 


Customs ofifices 






, , 480,728.69 


Emoluments (customs) . 






, . . 368,822.74 


Emoluments (judiciary) 






c . 25,315.39 


Patent office fees . 






. . 917.897-14 


Passports . . 






, . 20,115.00 


Copying (general land office) 






8,247.90 


Copyright fees 






. . . 15.753-04 


National health laws 






1,647.68 


Total . . . , . 






. ^^4.564.390.85 


2 The Fee System in the United St 


ates, pp. 155-156, 161-16.^, 163-166, 174- 


186-189. 









75t 



FEES 20 1 

ably originated in the frequent explosions and consequent fires 
due to the inferior quaUty of the oil at first put upon the market. 
The modern oil-inspection laws may roughly be said to begin 
about 1880. A few instances may be found earlier, but the 
subject did not become of much importance until the great Ameri- 
can oil fields had been discovered and exploited. Indeed, it 
is the aggressiveness and power of the Standard Oil and other 
companies, in keeping up the price and lowering the quality of 
the oil, which may largely be considered the cause of the later 
legislation on this subject. The consumption of oil increased 
enormously, until it became a necessity to everybody ; and as 
the quality gradually deteriorated, popular discontent made 
itself felt in the form of legislation prohibiting the sale of any oil 
below a certain quality. Public oil inspectors were provided, 
usually by appointment, whose compensation consisted in fees 
fixed in amount by law. In general these were determined by 
the quantity offered for inspection at the time, usually a certain 
number of cents per barrel. Many states make the fees regres- 
sive in amount, in that the charge per barrel decreases as the 
number of barrels inspected at the time increases, from forty 
cents for a single barrel to ten or fifteen cents if over ten barrels 
are inspected at one time ; while one state provides that the 
inspector shall be paid by the hour. The other state laws on 
the subject fix the fee per barrel ranging in amount all the way 
from ten to twenty-five cents, with no reduction for large quan- 
tities. Nebraska pays its oil inspectors fixed salaries. Minne- 
sota requires all oil-inspection fees to be paid into the treasury, 
and other states limit the amount which an inspector can 
receive as his official income to a certain maximum. 

2. Fees for marriage licenses. — The oldest and most common 
form of license regulations which has existed, and which exists 
to-day in some form or other in every state or territory in the 
Union, is that of the marriage license. This is one of the first 
and perhaps the most important of the regulations affecting that 
fundamental institution of human society — the family ; and 
upon the character of this regulation depends the success or 
failure of the only direct interference which the state exercises 
over the marriage relation. It is an important function, which 
most states have neglected to exercise in the interests of society. 



202 SELECTED READINGS IN PUBLIC FINANCE 

Only twenty-one states require any returns of marriages to be 
made to any state officer, and but few commonwealths have 
compulsory registration of marriages. It would take too long 
to give even an outline of the public services performed for which 
the license fee is charged, much less to trace the causes which 
brought about the legislation. Suffice it to say, that the num- 
ber and nature of the requirements, as outlined in the statutes of 
the different states, varies very decidedly. One state requires a 
statement of the age of the parties and proof of their com- 
petency to contract marriage, before the license shall issue ; 
another prescribes that bonds be given as a guarantee that the 
parties are entitled to marry; another simply prescribes that the 
license, or the application for a license, be recorded in some 
office. Louisiana gives the probate judge power to suspend 
marriage, if any objections are raised, until a hearing has 
been had. Maine requires a notice of intention to marry to be 
recorded with the town clerk five days before the license is 
granted. Maryland requires an examination of the applicant 
for license, under oath, to ascertain whether any legal impedi- 
ment to his or her marriage exists. Massachusetts requires 
notice of intent to marry. Pennsylvania requires parental con- 
sent in certain cases. These and many other requirements are 
deemed important enough to be enacted into law, and for the 
exaction of fees for the services performed by the officials in 
carrying them out. The enforcement of these laws, in thirty-five 
states, is left to a mere clerical official, — the county clerk, 
county recorder, or some other registering official. In the other 
states the licenses are dispensed by the county or probate judge. 
The fees for these services of the officials, and for the license 
proper, vary from 50 cents to $3. Several states require the fee 
for the Ucense proper to be .paid into the state treasury, and give 
the officials power to collect extra fees for their services. Most 
states, however, give the fees as perquisites of office to one or 
more of the officials concerned. In many of these cases the 
marriage license fee loses its most important function, namely, 
that of regulation. It was originally intended to be a payment 
for a privilege granted only in cases where it appeared advisable. 
Under this system, the pecuniary interest of the official is 
in many cases diametrically opposed to his plain duty under the 



FEES 203 

law. As a matter of fact, it is notorious that marriage licenses 
are rarely refused in any state. It is largely to this system that 
we owe the large number of wild and runaway marriages often- 
times contracted by mere children. 

3. Fees for liquor licenses. — To the great majority of the 
people, the word ** license " will call to mind, or will mean, 
simply the permit to sell liquor, which is obtained in most states 
on payment of a certain sum of money. The license legislation 
on this subject alone, when taken together, shows a greater diver- 
sity in the different states than would at first thought seem 
possible. In most of the original states the license charges, as 
they exist to-day, are the result of a gradual increase of the 
amount charged at the beginning of the century. For example, 
the license fee in Rhode Island has increased from ^4 in 1822 
to ^400 in 1 896. Many of the new Western states have of course 
adopted laws which are taken directly from the statute books of 
Eastern states, and some of them have attempted new experi- 
ments in license legislation. Scarcely two states have exactly 
the same system. One state grants all the licenses directly 
through a state official, and receives all the fees into the state 
treasury ; another state leaves both the power to grant the license 
and the revenue therefrom to the local political units. One 
commonwealth has a license or excise commission which grants 
all licenses and turns half the proceeds into the state treasury 
and grants the other half to the counties and municipalities. In 
some states the counties are the most important political units, 
and the county commissioners or county boards are given power 
to grant all licenses. In others the cities, villages, and towns 
are given this power, and are allowed to use some or all the 
revenue derived from this source. But as a rule the state legis- 
lature gives the counties, cities, or towns power to grant the 
license only under the conditions it prescribes. In some states 
these are allowed a great deal of latitude in imposing restrictions 
on their grants, and oftentimes, too, in prescribing the amount 
of the fee. In a few states the localities are given " local option," 
as it is called, or, in other words, power to allow or entirely pro- 
hibit the sale of liquor within their boundaries. 

4. Fees for incorporation of companies. — An incorporation 
fee is in most cases collected for filing the charter of articles 



204 SELECTED READINGS IN PUBLIC FINANCE 

of incorporation. Six states charge only ^5 and two charge 
less than this amount, while all the rest charge amounts vary- 
ing from $S to $100 for this service. It should be borne in 
mind, however, that the incorporation fees include all the 
charges made by the state under various heads, and that the 
total amount, instead of the individual fees, is the important 
consideration. The most common and the fairest method of 
gauging the incorporation fee is to make it proportional to the 
amount of capital stock. Five states have adopted this method 
in full, and charge from 10 cents to ^i per thousand dollars of 
authorized capital stock. Six other states have a slight modifi- 
cation of this system, in that they charge a certain minimum 
fee for any amount of capital stock up to a certain limit, and 
then collect from 50 cents to $1 per thousand of capital stock over 
this amount. A very large corporation would, under this latter 
system, yield some revenue to the state treasury. These fees 
were originally designed only to cover the expenses incurred 
by the state in granting incorporation rights and regulating 
them when granted. 

5. Fees for judicial p7'ocesses. — Sheriffs, constables, clerks of 
court, and other court officers are, as a rule, remunerated in 
the same way. In the older states scarcely any changes in this 
part of the fee system have been accompHshed. The result is, 
that many of the court officials are receiving fees which were 
designed for conditions existing from fifty to one hundred years 
ago. Not only are the fees entirely unsuited in amount to the 
modern conditions, but many of the primitive forms and formu- 
las are clung to with great tenacity. The following example 
will illustrate this : In the early courts the sheriff was usually 
the jailer, court messenger, and constable ; this custom, once 
established, has been continued in most of the older states, and 
as a result the sheriffs pocket enormous amounts of fees for 
services which they are supposed to perform in these three dis- 
tinct capacities. 

In spite of the numerous and heavy fees the courts are 
nowhere self-supporting. Not even those courts which deal 
exclusively with civil cases and have all their docket fees and 
other fees are able to maintain themselves without heavy drafts 
upon the state or local treasuries. Reforms to remedy this 



FEES 205 

have been proposed, now in one state, now in another, but the 
legislatures of the older states have not been able to rectify 
even the most glaring inconsistencies. The only states that 
have attempted any reform or solution of these problems are 
a few Western commonwealths, which are less hampered, and 
freer from the influence of old customs, traditions, and institu- 
tions. These have succeeded apparently in taking some de- 
cided steps in advance of any Eastern state. 

Colorado, by an act passed in 1891, divided the counties of 
the state according to population into six classes, the first class 
containing all counties having a population of over 50,000, and 
the sixth class all those of less than 3000. The fees of all 
county or court officers were graded according to the class in 
which the county happened to be. It was further provided that 
all county officers should be paid salaries fixed by law, and that 
all fees or emoluments of office of every kind should be ac- 
counted for and paid into the treasury. Idaho passed an act 
in 1887 based on a somewhat similar scheme. Here the coun- 
ties were divided into five classes according to the assessed valu- 
ation of property in each, the lowest being $500,000 and the 
highest, ;^3, 2 50,000. A maximum and a minimum salary for the 
several county officers of each class was fixed by law ; and pro- 
vision was made that the fees collected by each, with the excep- 
tion of those of justices of the peace, should be accounted for 
and paid into the county treasury. Montana has divided the 
counties into eight classes, and adopted provisions similar to 
those already mentioned. Nevada in 1885 fixed by law the 
salaries of some of the county officers and provided that all fees 
should be paid into the county treasury. Arizona has still 
another system. Here the counties are classified according to 
the number of registered voters in each. Officers in those 
counties having less than 750 voters receive fees and salary 
which together shall not amount to more than ;^6oo. Counties 
having less than 1500 voters may remunerate their officers by 
means of fees and salaries; while officers of counties having 
more than 1 500 voters are, within certain maximum limits, to 
be allowed the fees of office only. California has a much more 
elaborate system. An act passed in 1891 divided the counties 
of the state into fifty-three classes based on population. In the 



2o6 SELECTED READINGS IN PUBLIC FINANCE 

first class were all counties of over 400,000 inhabitants^ 
while the fifty-third class contained all having less than 2000, 
The salaries for the county clerks, sheriffs, auditors, recorders, 
treasurers, tax collectors, assessors, and district attorneys were 
fixed for each class, and provision made that the fees collected 
should be paid into the county treasuries. The other officers, 
— coroners, justices of the peace, constables, and so on — are 
allowed to receive fees ; but it is required that an account be 
kept, and any excess over the maximum allowed must be paid 
into the county treasury. 

The only one of the older states which has as yet attempted 
to deal with this question in this way is Kentucky. A law, 
passed in 1895, fixed certain maximum amounts which might 
be retained as salaries by the county officers; and provided 
that all sums received above such amounts should be paid into 
the treasuries, and heavy penalties were prescribed for false 
reports by any official. An attempt was made a year earlier 
to limit the amount which might be retained by city officials 
out of the fees received. 

It would appear as though some one of the above schemes, 
if thoroughly carried out, would furnish an adequate solution 
for this grave problem. One thing, however, seems certain ; 
and that is, that the experiments which these Western states 
are carrying on will be of interest and value to every state in 
the Union, whatever their result may be. The problem is one 
which confronts almost every locality, although the abuses are 
more manifest in some states than in others. Thoughtful men 
and wise legislators are beginning to take more and more inter- 
est in the legislative reforms which are attempted, not only 
within the Union, but in other countries. If the reforms out- 
lined above should at all meet the expectations of the reformers, 
it will only be a question of time until the movement will spread 
over the entire West and even overcome the inertia and con- 
servatism of many Eastern commonwealths. But the reform 
is bound to come in course of time, even if it is not accomplished 
by such legislation at a single stroke. It requires no great 
power of observation to see that a change is gradually going 
on in every one of the states in the Northwest. One official after 
another is transferred from the fee to the salaried list. Scarcely 



FEES 207 

a session of a legislature closes without having accomplished 
one or more changes in this respect. 

29. The Fee System as a Social Force. — Some of the impor- 
tant social effects of our fee system are thus described by 
Professor Urdahl : ^ 

I. The fee system and the tramp question. — Tramp life is 
made possible and even agreeable by private charity and alms, 
or by state aid and relief. A great deal has been said, and a 
great stress has been laid, upon the evils of indiscriminate char- 
ity and outdoor relief, while scarcely a voice is heard against 
the direct premium placed upon vagrancy, as a result of the 
use of the fee system to remunerate certain public officers. The 
average tramp would be forced either to work or to starvation 
if he could find no comfortable or convenient county jail in 
which to spend the long cold winter. Under existing conditions, 
however, he is often a welcome visitor at these public lodging 
houses; for both the jailer and sheriff are financially better off 
for each extra ** knight of the road " whom they can induce to 
accept their hospitality, because the county pays the bill at so 
much per head, and the larger the number, the greater the profits 
for the keeper.2 What wonder that some of our county jails 
are known far and wide among the vagrant classes for their 
accommodations ! Is it surprising that instances repeatedly 
occur, where the tramp commits some misdemeanor before the 
very eyes of the sheriff or constable, with the express purpose 
of securing a commitment to jail for a period of time } 

Counties using this system find the number of tramps increas- 
ing year after year, in spite of the fact that the jail or prison is 
crowded the greater part of the time. This has continued, in 
many cases, until the expense of maintaining tramps has become 
unbearable, and a demand is made for a new system. As a 
result the jailer and sheriff, or both, are given a fixed allowance 
out of which to feed and support all prisoners,^ and a certain 
amount of labor is required of these to relieve the monotony. 

1 The Fee System in the United States, 211-230. 

2 Tramps are often furnished with liquor, tobacco, and newspapers, to induce 
them to return. ® This system is now in force in several counties in Wisconsin. 



2o8 SELECTED READINGS IN PUBLIC FINANCE 

The conditions become changed. The sheriff is no longer 
interested in having as large a number of tramps as possible 
within his county. Life within the prison walls is made less 
attractive ; and as a result the stream of vagrants takes another 
route, through more hospitable districts. A change like the one 
above described took place in Dane county, Wisconsin ; and in 
four years the cost of maintaining tramps was reduced from 
^15,000 to ^3000. This amount represents the taxes annually 
levied and actually paid by the pubHc in a single county to 
support the tramp during that season of the year in which 
he cannot depend on private charity. In one sense it may be 
looked upon as a standing bribe to encourage shiftlessness, in 
the same way that the poor laws of the last century put pauper- 
ism at a premium in England.^ 

The jailer and keeper are not the only public officers who 
are interested in the existence and presence of the tramps. 
Where the fee system is fully applied, we find every judicial 
officer more or less interested in having as many tramps brought 
up for trial as possible. It means, as a rule, a fee for the judge, 
a fee for the sheriff,^ and a fee for every other officer who takes 
part in the trial. It is but natural that inducements should be 
made for the vagrant to return and be rearrested,^ to be perhaps 
again committed to jail for a short time. Indeed, to such an 
extent have these frauds been carried, that it has been found 
necessary in some states * to pass laws prescribing heavy 
penalties for conspiracy between tramps and judicial officers^ to 
defraud the counties.^ 

1 A member of the Wisconsin State Board of Charities estimates that the tramps, 
through the fee system, cost the state over a quarter of a million dollars a year. 

2 The fees of the sheriff for each tramp are said to run from four to six dollars, 
while those of the judge vary from two to three dollars. 

3 Tramps are often induced to appear before the justice in the forenoon under 
one name and in the afternoon under another, so as to earn extra fees for each 
official. 

* Laws of Wisconsin, 1889. 

^ Some cases have been found where the same tramp was serving three different 
terms at one time, by being discharged and rearrested and recommitted to jail, so as 
to earn fees for the sheriff and magistrate. 

^ This state of affairs is not confined to a few states. Inquiries in the different 
states show that the same frauds have been, or are at present, prevalent in New York, 
in New England, in the South, in the Middle states, and in the far West. 



FEES 209 

2. Fees in police courts and crime. — Until quite recently both 
the police force and the municipal courts in most of our large 
cities were supported more or less by fees and fines, under the 
mistaken idea that the main function of police officers was to 
catch criminals, and the function of courts was to pronounce 
sentence on them when caught. It was also supposed that these 
pubhc officials would perform their duties more efficiently if 
impelled by self-interest. This conclusion seems reasonable 
enough at first blush, but the trouble is that it is based on 
absolutely false premises. The great and primary function of 
a police officer is not the apprehension of criminals, but the 
repression of crime. Paying a police officer according to the 
number of arrests made is about like paying a teacher accord- 
ing to the number of floggings he has inflicted. 

Not only that, but we have a large body of men whose bread 
and butter depends on having the law violated, although they 
are themselves its ministers. The idea never seems to have 
occurred that there was any danger of overofficiousness on the 
part of any official. The more criminals caught, the better, it 
is said. True! — but have we any guarantee that the police-- 
man will catch only actual criminals t What is to prevent him 
from making arrests on slight suspicions, or for trifling and 
unwarrantable reasons } The same self-interest impels him in 
the latter as in the former case. As a rule, hungry men are not 
overscrupulous about the means and methods which will secure 
them bread. There is every reason to believe that they would 
sacrifice their most important function, that is, that of repres- 
sion, to the more profitable employment of making arrests. 
Indeed, this is amply illustrated by the experience of every city 
which has changed from fee-paid policemen to salaried officers. 
An act of the Maryland legislature abolished the fee system in 
Baltimore in 1862, and as a result the number of arrests for 
minor offenses decreased from twelve to seven thousand. The 
decrease in the number of arrests did not result in more lawless- 
ness or more petty offenses, but can be accounted for by the 
fewer uncalled-for and unnecessary arrests. 

3. Fees and justices of the peace. — There is, perhaps, no 
part of the American judicial system which exists with such 
uniformity in all states as the justice of the peace. And every- 



2IO SELECTED READINGS IN PUBLIC FINANCE 

where, almost without exception, his remuneration consists in 
the fees which he collects. This official seems almost indispen- 
sable to the local administration of justice, and no state has as 
yet been able to devise any fair and economical system of com- 
pensation other than fees. 

The amount of business done by each of these officials varies 
from time to time and place to place. One justice may have 
regular daily sessions, while another is scarcely ever called upon 
to act. All cannot be paid salaries, as it would entail enormous 
expense to the public ; and apparently such a system would be 
unjust to the magistrate who is called upon to act often. To 
the casual observer, it would seem, therefore, as though some 
well-devised scale of fees would be the only just and fair method 
of remuneration. But a closer investigation will reveal the fact, 
that other things must be taken into consideration besides the 
interest of the justice of the peace and the economy of public 
money. There is such a thing as a " penny wise and pound 
foolish " policy in public as well as in private economics. 

I'erhaps no single influence has done more injury through the 
American courts than the fee system in its effects on the justice 
of the peace. The men who occupy this position are not as a 
rule of such a character that they can stand by and uncon- 
cernedly see all cases, and in consequence all fees connected 
with them, go to the rival or neighboring justice. As a rule, 
they are not men of means, and a fee more or less is of great 
importance. What is the result ? The result is that the deci- 
sion of a justice of the peace is almost certain to be a discrimi- 
nation in favor of the plaintiff. Why ? Because it is the plaintiff 
who begins the suit, and he or his lawyer has the option of 
bringing the case in Justice A's or Justice B's or any other 
court. If he brings it into Justice A's court, it means a cer- 
tain number of fees for him, and he must therefore show his 
gratitude by rendering his judgment for the plaintiff. But sup- 
pose the justice has the moral courage to decide the case on its 
merits, and that as a result his decision is in favor of the defend- 
ant. The consequence is that Justice A will receive no more 
patronage from that lawyer or plaintiff. All the cases, and 
hence all the fees, which he might have had, are therefore 
transferred to Justice B, who is more grateful. 



FEES 211 

These cases. are not pure assumptions. They are actual facts 
which are known and utilized every day by lawyers throughout 
the land. The many upright and conscientious justices, whose 
characters are above reproach, are prevented from exerting 
even the average amount of influence by the vicious system, 
which from its very nature drives the business into the courts 
of these disreputable wretches who are willing to barter their 
judgment for a paltry fee. The system becomes in its essence, 
in many cases, a legalized method of bribery. The whole ad- 
ministration of justice is perverted in that large class of cases 
in which the humbler classes of the community are most likely 
to be affected. Such a system would not be tolerated in the 
higher courts, while here it is continued year after year without 
protest, because the cases affected, as a rule, are petty and insig- 
nificant in regard to the amount involved. 

4. Fees of the district attorney and the administration of 
justice. — One of the relics of barbarism which exists in some 
states or, perhaps more accurately, one of the barbarous inven- 
tions of the nineteenth century, is the system of paying district 
or state attorneys fees, varying in amount according to the 
number and character of the convictions secured. This method 
is not based on the experience of any state, but is like so many 
other unpractical schemes which are adopted and applied in many 
Western commonwealths. To be sure, there have been laws in 
some of the original states which are somewhat similar and 
may be called antecedents of these. But the differences are 
broad and far-reaching. A Connecticut statute of 1796 pro- 
vided that the state attorney should receive fees roughly pro- 
portioned to the nature of the trial. ^ For prosecuting a trial for 
a capital offense he secured ^14, for any other criminal case $% 
and for any civil case ^3.34. This, however, is widely different 
from the system now in force in California, which pays the 
attorney ^50 for every conviction he secures for a capital 
offense, ^25 for each conviction of felony, and $\^ for misde- 
meanor; and, with the object apparently of especially punish- 
ing gambling, the same premium is placed on conviction under 
the act prohibiting gaming as for a capital offense. 

1 An early law of Delaware gave the attorney-general ^lo for the prosecution of a 
capital offense and ^2.40 for drawing an indictment, etc. 



212 SELECTED READINGS IN PUBLIC FINANCE 

In Arkansas the prosecuting attorney receives $y$ for a con- 
viction of a capital offense, $2$ for felony, ^25 for gambling, 
and ^10 for each misdemeanor. In Tennessee the district 
attorney receives $50 for each conviction for violation of the 
anti-trust law ; while for obtaining a conviction for murder or 
wearing bowie-knife or violating the law against conspiracies, 
the fee is $2$ ; for a conviction for perjury, ^15 ; felony, ;?io; 
and misdemeanor, ^5. In Nevada the fees are relatively the 
same, but five times as large. In Oregon there is another 
departure. Here the attorney receives certain fixed fees for 
convictions, and in case the trial results in acquittal he receives 

only half the amount. 

* * * * * * ^ 

All of these methods are fundamentally wrong, and based on 
a theory which cannot be supported either by facts or by argu- 
ments. It is supposed to increase the efficiency of the attorney 
by offering him a pecuniary inducement to undertake and prose- 
cute cases. But is there not every legitimate incentive to an 
attorney to do his work well, even when he is paid by salary } 
His reputation as a lawyer is at stake; the esteem and good- 
will of his constituents impel him to prosecute every legitimate 
case. His success as a lawyer after his term of office expires 
will depend largely on the way in which he performs his duties 
of office. He can gain nothing by letting crime go unpunished, 
and he has everything to lose. 

But suppose that the man is of such a character that the paltry 
fee will stimulate him to action. If it is only the money he is 
after, what is to prevent him from accepting a higher reward 
from the criminal for not prosecuting than the state offers for 
conviction .? What is to prevent him from " drumming up " 
business by beginning suits wherever there is the slightest 
chance of winning } 

5. The fee system and political corruption. — Very few people 
are so ignorant of politics as not to have heard, from rumor at 
least, of public offices the emoluments of which are so great as 
to enrich the occupant in a single year. No public office in the 
gift of the people is of such importance as to yield a regular 
legal salary of ;^ 100,000, even though it requires the highest 
grade of ability which the country can furnish. This amount 



FEES 213 

has been received more than once, however, by officers whose 
duties and abilities were of a comparatively low order. The 
position of sheriff in a densely populated county, or that of 
recorder or collector, are offices which do not require a very 
high grade of attainments ; and yet these purely clerical officers 
have often been paid a higher salary than the President of the 
United States. Some of these are reported to yield fabulous 
sums ; ^ yet no actual facts can be ascertained as to the real 
value of such offices, as they are usually kept a close secret 
among a favored few of the leading politicians of either party. 
Very often no account of the receipts of office is required by 
law ; hence none is given. 

These positions are usually the goal of the ambition of every 
politician. There is, therefore, the most intense competition, not 
only within the political parties for obtaining the nominations, but 
among the people to secure election when once nominated. 
These lucrative offices furnish the lifeblood of the spoils system 
and the political machine. The manipulators of the machine, 
knowing the value of such an office, can levy higher assessments 
for the corruption fund the greater the amount received from 
the office. Especially is this the case where a political party 
practically controls the election. It does not require any great 
power of observation to see that in all local or state elections, 
the heaviest pressure is, as a rule, brought to bear on those 
particular offices in which the remuneration is wholly or partly 
paid in fees or other perquisites. It is the office of county 
sheriff in most places which is the center of the political whirl- 
pool. In many Eastern cities the office of prothonotary, clerk 
of court, or recorder is the most powerful incentive to political 
activity .2 The political forces which are set in motion to obtain 

1 The income of the city clerk of Chicago was asserted to be ^49,000 for two years. 
Chicago Ti^nes- Herald, Jan. 16, 1896, p. i. The Chicago recorder's income was esti- 
mated by an investigating committee to have been nearly ^9000 for six months. 
Ibid. Dec. 7, 1896, p. 7. The position of county sheriff in many counties in Wis- 
consin is said to yield as much as ^20,000 a year. Many county clerks earn over 
^5000 a year in fees. Newspaper reports are current that the collector of taxes 
under Governor Warmouth at New Orleans received as fees not less than ^100,000 
a year, for four years. 

2 A prominent New York attorney has furnished the following estimates which are 
said to be conservative : The position of sheriff of New York county used to yield 



214 SELECTED READINGS IN PUBLIC FINANCE 

these lucrative positions are almost incredible in power and 
magnitude. Each candidate has a whole army of henchmen in 
the field, each of these demanding pay either by some position 
or by money. How is all this possible ? Most of these posi- 
tions have no great amount of honor connected with them or 
even of influence, except so far as the subordinate appointments 
are concerned. The mainspring which furnishes the power for 
all this political machinery lies in the amount of salary which 
the fees yield to the officer. He can afford to spend ;^ 50,000 
in money and a year or two of his time to obtain an office that 
will, yield $100,000 a year in revenue. A man can afford to 
contribute liberally to the party fund who can realize such a 
sum if his party succeeds. Political office is not the greatest 
incentive or stimulus which he has. More is at stake. The 
candidate has usually invested his entire fortune on the issue, 
often also as much as he can borrow from his friends. Is it any 
wonder that he strains every nerve to win ? Is it surprising that 
no stone is left unturned which will aid his election .-* Success 
means not only a position for a year or two, but it means com- 
parative wealth and prosperity affecting his entire career, and 
opens the door to future advancement. It is almost in the 
nature of a wager in which everything is at stake. Under such 
conditions more or less corruption is inevitable ; and the worst 
of it is, that the people themselves pay the fees which con- 
stitute the corruption fund. The history of any of our large 
cities will furnish numerous examples, and there is scarcely a 
county in the older states in which the same spectacle has not 
been witnessed over and over again. 

******* 

The only remedy is to enforce the most rigid system of 
accountability, so that every fee collected is paid into the 
treasury. It is bad business management to allow an official to 
pay and appoint his own clerks. No private enterprise could 
exist for any length of time which employed such methods. 
A private estabHshment always pays its subordinates from the 
general treasury, and keeps a sharp watch over their salaries 

^125,000; at present it yields about ^25,000. The position of county clerk in New 
York City used to yield from ^80,000 to ^100,000; at present it is considered to be 
worth ^25,000. The office of register of deeds is at present worth about ^20,000. 



FEES 215 

and efficiency. The same economy must be applied to public 
affairs if they are to be well administered.^ All the corruption 
is not, as a rule, caused by bad legislation ; the laws creating 
the various offices and making provisions for their emoluments 
were legitimate and proper at the time when they were enacted. 
But most of them were enacted very early in the history of the 
country, and few, if any, radical changes have been made in 
them. But they have simply outlived their period of usefulness. 
Economic conditions have changed, while the laws have not been 
changed to fit them. The fee bill, which would yield barely 
enough revenue to support the sheriff of New York in 1840, 
would, if in force in 1890, produce a fortune in a single year. 
Why ? Simply because the business of the office has increased 
enormously on account of the growth of population. Further- 
more, the work can be done at a much lower cost. It is like 
production on a large scale, in that economies of various kinds 
can be practiced. 

The question immediately arises : Why have the legislatures 
so often failed to adjust law to economic conditions in this 
particular more than in others ? The answer is evident. Which- 
ever political party happens to be in power is directly interested 
in having as many lucrative offices to bestow as possible. A 
party is not likely to diminish the emoluments of an office when, 
by so doing, it diminishes to just that extent the patronage 

1 Elsewhere (p. 189) Professor Urdahl says : "Scarcely any of the states employ- 
ing the fee system have as yet required the officers to give any strict account of the 
total amount received as fees. Even if the new system is introduced, it becomes 
next to impossible to obtain any figures which will show in dollars and cents the 
total gain or loss due to the one system or the other. It is quite different with the 
federal officials, and more especially those connected with the federal courts. 
These were required comparatively early to give a complete account of every fee 
received. We have thus full and reliable statistics of the amounts collected as fees 
in the various courts for a long series of years. These figures show that the cost of 
maintaining the United States courts has for a number of years been increasing at 
the rate of .over a million dollars a year. On May 28, 1896, Congress passed an act 
which changed most of the officials connected with the federal courts from the fee 
to the salary system of compensation. The result is, that the total expenses under 
the new system for the current year 1897, according to the estimates made by the 
attorney-general, based on the returns for the first six months, will be ^4,861,465, as 
compared with ^6,675,239 for 1896, which was the cost under the fee system. This 
shows a total saving of ^1,813,774 in spite of the fact that the volume of business is 
on the increase." 



2l6 SELECTED READINGS IN PUBLIC FINANCE 

which it has to confer. Especially is this the case where no pres- 
sure in that direction is brought to bear upon the legislative body. 
There is likely to be no pressure of this kind for the diminution 
of the fees of an office or a change in the system, because no 
body of individuals, as a class, is likely to be especially affected 
or feel the burden of the system. The fees are paid intermit- 
tently, now by one person and now by another ; while the great 
majority of people rarely have any fees to pay at all. There has 
thus never arisen any popular demand for the publication of the 
amount of fees collected or for their reduction. As a result, we 
find that it is only at this late day that the same requirements are 
beginning to be made in regard to fees as were introduced in 
regard to taxes one hundred years ago ; namely, that their 
amount should be made public, and that all fees collected should 
be accounted for. This lack of knowledge of the number of fees 
collected has tended still further to discourage any agitation for 
their reduction. But whenever a movement of this kind is 
started, then all the fee-collecting officers, with all the political 
influence which they can command, stand ready to work against 
it.^ it is not strange, therefore, when everything is taken into 
consideration, that primitive laws have so long remained in 
force, and that they are even now with difficulty being displaced 
with more modern and suitable enactments. The movement 
seems to be in progress which appears destined to place every fee- 
paid public officer on a salary or what is equivalent to the same. 
This, together with civil-service reform, will ultimately remove 
the greater part of the political corruption connected with purely 
administrative offices. But from the very nature of American 
conditions, the movement must be slow and gradual. 

30. Revenue from Fees in Frankfort : by Anna Youngman.^ — 

The foregoing account of American conditions may be helpfully 
supplemented by an account of the fee system of a German city : 

1 A bill to abolish some minor sheriffs' fees in the Wisconsin legislature in 1896 
was defeated through the lobbying of the sheriffs and their friends. Numerous 
similar bills have met the same fate. It is a notorious fact, well known to all who 
are familiar with New York politics, that the recent amendment to the New York 
fee code failed to pass because of the opposition of sheriffs and other fee-paid 
officials, whose salaries would have been affected thereby. 

2 Reprinted from the Quarterly Joicr7tal of Economics^ Vol. XXVTT. 



FEES 217 

In addition to the revenues which the communities receive from 
the regularly recurrent taxes, the payments which take the form 
of fees and special assessments are important sources of income. 
Here again the K. A. G. opens a very wide field to the operation 
of the principle of payment in accordance with benefits re- 
ceived. For public expenditures bringing especial advantages to 
business men or property owners special contributions may be 
required and must be collected if otherwise the costs, including 
interest and amortization payments on the capital sum expended, 
would have to be met by taxes.^ Assessments for street construc- 
tion, sewer extensions, etc. are the most common form of payment. 
A rather unusual extension of the principle of special assessment 
for the use of the streets is found in Frankfort, where certain con- 
cerns engaged in heavy hauling operations, for example, several 
breweries and a flour mill, contribute to the cost of upkeep.^ 
The practice is unquestionably justified, for why should the com- 
munity defray all the costs of repairs, hastened by the continuous 
use of the streets by private individuals and private companies ? 

The design of Frankfort to assess fire-insurance companies 
for partial defrayal of the costs of the city fire department did 
not materialize,^ as it was felt to be a too far-reaching extension 
of the principle of assessment. 

The K. A. G. also aims to bring about a development of the 
fee system for the use of public institutions, and, indeed, such 
fees are made obligatory in case particular individuals or classes 
are especially advantaged (i.e. providing the latter have not 
been previously forced to defray a part of the costs through 
special assessments or taxes). ^ The fees are to be fixed in ad- 

1K.A.G., §9. 

2 Haushaltsplan, 1910-11, section Tiefbauamt ; contributions from companies 
for the use of city streets, 3965 m., breweries, 3581 m., flour and bread, 300 m. ; 
total, 7846 m. 

8 Adickes-Woell edition, K. A. G., note 2 to § 9. 

* In the case of communal institutions or undertakings which especially benefit 
a particular section or a particular class of citizens, heavier tax impositions may 
take the place of fees or assessments. Cf. K. A. G., § 20. 

Heavier taxation of individual industrial or commercial establishments may 
also be permitted. 

The principle is even extended to intercommunal relationships and it is pro- 
vided that whenever a community through its industries, etc., is the cause of the 
imposition of extra and unusual burdens upon a neighboring community, it can be 
forced to contribute to the resultant extraordinary disbursements. K. A. G., § 53. 



2l8 SELECTED READINGS IN PUBLIC FINANCE 

vance according to a set scale. A consideration of persons with- 
out means is permissible {nicht ausgeschlossen) , The chief ad- 
ministrative court of appeal (Oberverwaltungsgerkht) in interpret- 
ing this clause ruled, nevertheless, that a grading of fees for 
the same services according to ability to pay or other standards 
was not permissible. This decision led to the passage of a 
declarative lav/ which stated that it was permissible to grade 
the fees according to ability to pay, even to the point of entirely 
freeing certain individuals from payment. Another decision of 
the court (March '07) gave a restricted meaning to the declarative 
law also. It was held that a reduction of the normal^ tariff may 
be made, but not an increase according to increasing ability 
to pay, i.e. the payment may be reduced below the value of the 
service by a degression, but it cannot be increased by a progres- 
sion exceeding the value of the service.^ 

The raising of fees is not obligatory in the case of schools for 
elementary instruction, of hospitals, nor in general for institu- 
tions intended primarily to meet the needs of the poorer classes. 
For those attending the higher schools a payment is, however, 
compulsory, and from this source Frankfort obtained in 1910-11 
fees (Schulgeld) amounting to 1,322,700 m. The city also col- 
lects hospital fees from those patients able to pay (in many cases 
the payments are made from sick funds) granting reductions to 
persons with incomes imder 2100 m. Minor fees are, of course, 
raised, for building inspection, for example, through the registry 
offices (Standesamter), the Gewerbe- and Kaufmannsgerichte, etc. 
But a further consideration of fees can best be discussed in con- 
nection with the various municipal public-service undertakings. 

1 The normal tariff as defined in the K. A. G., § 4 : 

The rates are, as a rule, to be so fixed that the costs of administration and up- 
keep, including the payments for interest and amortization on the capital expended, 
are covered. 

2 It will later be apparent that the practice in Frankfort hardly conforms to 
this dictum. 



CHAPTER VIII 

GENERAL PROPOSITIONS CONCERNING TAXATION 

31. Smith's Canons of Taxation. — Few passages in the 
literature of finance are more celebrated than those with which 
Adam Smith introduces his discussion of taxation. Smith 
said : ^ 

The private revenue of individuals, it has been shown in the 
first book of this inquiry, arises ultimately from three different 
sources : rent, profit, and wages. Every tax must finally be 
paid from some one or other of those three different sorts of 
revenue, or from all of them indifferently. I shall endeavor 
to give the best account I can, first, of those taxes which it is 
intended should fall upon rent; secondly, of those which it 
is intended should fall upon profit ; thirdly, of those which 
it is intended should fall upon wages ; and fourthly, of those 
which it is intended should fall indifferently upon all those 
three different sources of private revenue. The particular con- 
sideration of each of these four different sorts of taxes will 
divide the second part of the present chapter into four articles, 
three of which will require several other subdivisions. Many 
of those taxes, it will appear from the following review, are not 
finally paid from the fund or source of revenue, upon which 
it was intended they should fall. 

Before I enter upon the examination of particular taxes, it is 
necessary to premise the four following maxims with regard to 
taxes in general. 

I. The subjects of every state ought to contribute toward 
the support of the government, as nearly as possible in pro- 
portion to their respective abilities ; that is, in proportion to the 
revenue which they respectively enjoy under the protection of 

1 Wealth of Nations, Bk. V, ch. 2. 
219 



220 SELECTED READINGS IN PUBLIC FINANCE 

the state. The expense of government to the individuals of a 
great nation is like the expense of management to the joint 
tenants of a great estate, who are all obliged to contribute in 
proportion to their respective interests in the estate. In the 
observation or neglect of this maxim consists what is called 
the equahty or inequality of taxation. Every tax, it must be 
observed, once for all, which falls finally upon one only of the 
three sorts of revenue above mentioned, is necessarily unequal, 
in so far as it does not affect the other two. In the following 
examination of different taxes I shall seldom take much further 
notice of this sort of inequahty, but shall, in most cases, confine 
my observations to that inequality, which is occasioned by a 
particular tax falling unequally even upon that particular sort 
of private revenue which is affected by it. 

2. The tax which each individual is bound to pay, ought to 
be certain, and not arbitrary. The time of payment, the manner 
of payment, the quantity to be paid, ought all to be clear and 
plain to the contributor, and to every other person. Where 
it is otherwise, every person subject to the tax is put more or 
less in the power of the taxgatherer, who can either aggravate 

'fhe tax upon any obnoxious contributor, or extort, by the terror 
of such aggravation, some present or perquisite to himself. 
The uncertainty of taxation encourages the insolence and 
favors the corruption of an order of men who are naturally 
unpopular, even where they are neither insolent nor corrupt. 
The certainty of what each individual ought to pay is, in taxa- 
tion, a matter of so great importance, that a very considerable 
degree of inequality, it appears, I believe, from the experience 
of all nations, is not near so great an evil as a very small degree 
of uncertainty. 

3. Every tax ought to be levied at the time, or in the manner, 
in which it is most likely to be convenient for the contributor to 
pay it. A tax upon the rent of land or of houses, payable at 
the same term at which such rents are usually paid, is levied 
at the time when it is most likely to be convenient for the con- 
tributor to pay, or when he is most likely to have wherewithal 
to pay. Taxes upon such consumable goods as are articles of 
luxury, are all finally paid by the consumer, and generally in 
a manner that is very convenient for him. He pays them by 



PROPOSITIONS CONCERNING TAXATION 221 

little and little, as he has occasion to buy the goods. As he 
is at liberty, too, either to buy or not to buy, as he pleases, it 
must be his own fault if he ever suffers any considerable incon- 
veniency from such taxes. 

4. Every tax ought to be so contrived as both to take out and 
to keep out of the pockets of the people as little as possible over 
and above what it brings into the public treasury of the state. 
A tax may either take out or keep out of the pockets of the 
people a great deal more than it brings into the public treasury, 
in the four following ways. First, the levying of it may require 
a great number of officers, whose salaries may eat up the greater 
part of the produce of the tax, and whose perquisites may im- 
pose another additional tax upon the people. Secondly, it may 
obstruct the industry of the people, and discourage them from 
applying to certain branches of business which might give main- 
tenance and employment to great multitudes. While it obliges 
the people to pay, it may thus diminish, or perhaps destroy, some 
of the funds which might enable them more easily to do so. 
Thirdly, by the forfeitures and .other penalties which those un- 
fortunate individuals incur who attempt unsuccessfully to evade 
the tax, it may frequently ruin them, and thereby put an end ta 
the benefit which the community might have received from the 
employment of their capitals. An injudicious tax offers a great 
temptation to smuggling. But the penalties of smuggling must 
rise in proportion to the temptation. The law, contrary to all- 
the ordinary principles of justice, first creates the temptation, 
and then punishes those who yield to it; and it commonly 
enhances the punishment, too, in proportion to the very cir- 
cumstance which ought certainly to alleviate it, the temptation 
to commit the crime. Fourthly, by subjecting the people to 
the frequent visits and the odious examination of the tax- 
gatherers it may expose them to much unnecessary trouble, 
vexation, and oppression; and though vexation is not, strictly 
speaking, expense, it is certainly equivalent to the expense at 
which every man would be willing to redeem himself from it. 
It is in some one or other of these four different ways that taxes 
are frequently so much more burdensome to the people than 
they are beneficial to the sovereign. 

The evident justice and utility of the foregoing maxims have 



222 SELECTED READINGS IN PUBLIC FINANCE 

recommended them more or less to the attention of all nations. 
All nations have endeavored, to the best of their judgment, to 
render their taxes as equal as they could contrive ; as certain, as 
convenient to the contributor, both in the time and in the mode 
of payment, and, in proportion to the revenue which they 
brought to the prince, as little burdensome to the people. The 
following short review of some of the principal taxes which 
have taken place in different ages and countries will show that 
the endeavors of all nations have not in this respect been 
equally successful. 

32. The General Economic Effect of Taxation. — In his Essay 
on Taxes,^ David Hume remarked : 

There is a prevailing maxim,^ among some reasoners, that 
every new tax creates a new ability in the subject to bear ity and 
that each increase of public burdens increases proportionably the 
industry of the people. This maxim is of such a nature as is 
most likely to be abused; and is so much the more dangerous, 
as its truth cannot be altogether denied : but it must be owned, 
when kept within certain bounds, to have some foundation in 
reason and experience. 

When a tax is laid upon commodities which are consumed by 
the common people, the necessary consequence may seem to be, 
either that the poor must retrench something from their way of 
living, or raise their wages, so as to make the burden of the 
tax fall entirely upon the rich. But there is a third conse- 
quence, which often falls upon taxes; namely, that the poor 
increase their industry, perform more work, and live as well as 
before, without demanding more for their labor. Where taxes 
are moderate, are laid on gradually, and affect not the neces- 
saries of life, this consequence naturally follows ; and it is cer- 
tain, that such difficulties often serve to excite the industries of 
a people, and render them more opulent and laborious than 
others, who enjoy the greatest advantages. 

1 Political Essays (1752). 

2 Daring the seventeenth and eighteenth centuries many writers in England 
argued that taxes have a tendency to stimulate industry ?nd frugality. See 
Seligman, Shifting and Incidence of Taxation, 32-39. — Ed. 



PROPOSITIONS CONCERNING TAXATION 223 

A similar opinion was expressed by J. R. McCulloch nearly a 
century later : ^ 

The writers on finance, patronized by European governments, 
have mostly labored to show that taxation is never a cause of 
diminished production ; but that, on the contrary, every new 
tax creates a new ability in the subject to bear it, and every 
increase of the pubHc burdens a proportional increase in the 
industry of the people. The fallacy of this opinion, when 
advanced thus absolutely and without reservation, has been ably 
exposed by Hume in his Essay on Taxes. But, as already seen, 
it is undoubtedly true that the desire to maintain and improve 
their condition stimulates most men to endeavor to discharge 
the burden of additional taxes by increased industry and econ- 
omy, without allowing them to encroach on their means of sub- 
sistence, or on their fortunes. 

The operation of this principle has been strikingly evinced in 
the financial history of this country since the commencement of 
the American war. That contest, and the more recent struggle 
with revolutionary France, occasioned a vast increase of taxa- 
tion, and an expenditure that has no parallel in the history of the 
world. The public debt which amounted to about 129 millions 
in 1775, amounted to about 848 millions in 1817; and, in addi- 
tion to the immense sums raised by borrowing, the gross produce 
of the taxes levied in the United Kingdom during the late war 
exceeded the enormous sum of iioo millions sterling. And yet 
the rapid increase of population — the wonderful progress and 
improvement of agriculture, manufactures, and commerce — the 
extension and embellishment of towns and cities — the formation 
of so many new docks, roads, and canals — and the infinite 
variety of expensive undertakings entered upon and completed 
in all parts of the country during the continuance of hostilities — 
show clearly that the savings of the mass of the people greatly 
exceeded the warlike expenditure of government and the 
unprofitable expenditure of individuals. 

* * * * * * * 

The constantly increasing pressure of taxation during the war, 
begun in 1793, was felt by all classes, and gave a spur to industry, 

1 Treatise on Taxation, 7-10 (second edition, 1852). 



224 SELECTED READINGS IN PUBLIC FINANCE 

enterprise, and invention, and generated a spirit of economy 
which we should have in vain attempted to excite by any less 
powerful means. Had taxation been very oppressive, it would not 
have had this effect ; but it was not so high as to produce either 
dejection or despair, though it was at the same time sufficiently 
heavy to render a very considerable increase of industry and 
parsimony necessary to prevent it from encroaching on the 
fortunes of individuals, or, at all events, from diminishing the 
rate at which they had previously been increasing. Man is not 
influenced solely by hope, he is also powerfully influenced by 
fear. Taxation brings the latter principle into the field. To the 
desire of rising in the world, implanted in the breast of every 
individual, an increase of taxation superadds the fear of being 
cast down to a lower station, of being deprived of conveniences 
and gratifications which habit has rendered all but indispensable ; 
and the combined influence of the two principles produces results 
that could not be produced by the unassisted agency of either. 
Without the American war and the late French war there would 
have been less industry and less frugality, because there would 
have been less occasion for them. And we incline to think that 
those who inquire dispassionately into the matter will most prob- 
ably see reason to conclude that the increase of industry and fru- 
gality occasioned by these contests more than sufficed to defray 
their enormous expense, and that the capital of the country is 
probably about as great at this moment as it would have been 
had they not occurred. 

But we must be on our guard against the abuse of this doctrine, 
and must not suppose that, because it holds in certain cases and 
under certain conditions, it will, therefore, hold in all cases and 
under all conditions. To render an increase of taxation produc- 
tive of greater exertion, economy, and invention, it should be slow 
and gradual ; and it should never be carried to such a height as 
to incapacitate individuals from meeting the sacrifices it imposes 
by such additional exertions and savings as it may be in their 
power to make with out» requiring any very sudden or violent 
change in their habits. The increase of taxation should never 
be so great as to make it impracticable to overcome its influence, 
or to induce the beUef that it is impracticable. Difficulties that 
are seen to be surmountable sharpen the inventive powers, and 



PROPOSITIONS CONCERNING TAXATION 225 

are readily and vigorously grappled with ; but an apparently in- 
surmountable difficulty, or such an increase of taxation as it was 
deemed impossible to defray, would not stimulate but destroy 
exertion. Whenever taxation becomes so heavy that the wealth 
it takes from individuals can no longer be replaced by fresh 
efforts, these efforts uniformly ceased to be made ; industry is 
paralyzed, and the country declines. Oppression, it has been 
said, either raises men into heroes or sinks them into slaves ; 
and taxation, according to its magnitude and the mode in which 
it is imposed, either makes men industrious, enterprising, and 
wealthy, or indolent, dispirited, and impoverished. 

And elsewhere in his treatise ^ McCuUoch offered the follow- 
ing illustration, which has been repeated by many writers : 

It is unnecessary, however, to travel beyond the limits of 
financial history for examples of the powerful influence of taxes 
in stimulating ingenuity and invention. Previously to 1786 
the duties on spirits distilled in Scotland were charged according 
to the quantities supposed to be actually produced. But as this 
mode of assessing the duty was found to open a door to exten- 
sive frauds, it was resolved to substitute in its stead a license 
duty, proportioned to the size of the still used by the distiller. 
Stills being all of the same shape, and the quantity of spirits 
that each could produce in a year according to its cubic contents 
having been accurately calculated, it was supposed that this plan 
would effectually prevent smuggling, and that the officers would 
have nothing to do but inspect the stills that had been licensed, 
to prevent their size being increased. On the first introduction 
of this apparently well-considered system, the license duty on 
each still was fixed at the rate of 30^". per gallon of its contents. 
The principle, however, on which the duty was assessed was 
very soon subverted. The stills in use down to this period were 
very deep in proportion to their diameter, so that after being 
charged they required at an average about a week before the 
process of distillation was completed. But the new mode of 
charging the duty had no sooner been introduced, than it 
occurred to two ingenious persons, Messrs. John and William 

ipp. 151-152. 



226 SELECTED READINGS IN PUBLIC FINANCE 

Sligo, distillers, Leith, that by lessening the depth of the still 
and increasing its diameter, a larger surface would be exposed 
to the action of the fire, and they would be enabled to run off 
its contents in considerably less time. Having adopted this 
plan, they found that it answered their expectations, and that 
they were able to distil the same quantity of spirits in a few 
hours that had previously occupied a week. Messrs. Sligo kept 
this important invention secret for about a year ; but it was too 
valuable to be long concealed, and the moment it transpired, 
the plan was adopted by other distillers. In consequence gov- 
ernment raised, in 1788, the license duty on the still from 30J. to 
;£3 a gallon. This increase having redoubled the activity of the 
distillers, the duty was raised in 1793 to ^9 a gallon, in 1795 to 
£iS, and in 1797 it was carried to the enormous sum of £$4 a 
gallon. Still, however, the ingenuity of the distiller outran the 
increase of the tax ; and it was proved, before a committee of the 
House of Commons in 1798, that distillation had been carried to 
such perfection, that stills had occasionally been filled and dis- 
charged once every ei£-kt minutes. This, it was supposed, must 
be the maximum of velocity, and a new license duty was laid on 
the still on the hypothesis that it could, at an average, be run off 
in that time, or that it could be filled and emptied once every 
eight minutes during the season. But the ingenuity of the 
distillers was not yet tasked to the highest. And it was ascer- 
tained that, toward the latter end of the license system, stills of 
forty gallons had been, at an average, filled and run off in the 
almost incredibly short space of t/iree minutes, being an increase 
of 2880 times on the rapidity of distillation that had obtained 
when the license system was introduced in 1786! 

Now it will not be alleged, at least with any appearance of 
probability, that had a duty of 5 or 10 per cent been laid on 
their income or capital, Messrs. Sligo would have been half 
so likely to make this important discovery. But being assessed 
on the still, the duty had the double effect of fixing attention 
specially on it, and of operating as a powerful incentive to 
its improvement.^ 

1 It is important to observe, however, as Bastable has pointed out, that "inven- 
tion had been stimulated, not by the duty, but by the possibility of escaping it." 
Thus not the payment of a tax, but the imperfect assessment which left a loophole 



PROPOSITIONS CONCERNING TAXATION 227 

33. The Views of Say. — While most economists have been 
content to emphasize more sharply than Hume and McCuUoch 
did the Hmitations and possible dangers of the proposition that 
taxes tend to stimulate industry and thrift, Jean Baptiste Say 
and a few others have denied that the statement contains the 
least kernel of truth. Say, for instance, saidi^ 

The same causes that we have found to make unproductive 
consumption unfavorable to reproduction, prevent taxation from 
at all promoting it. Taxation deprives a producer of a product 
which he would otherwise have the option of deriving a personal 
gratification from, if consumed unproductively, or of turning to 
profit, if he preferred to devote it to a useful employment. One 
product is a means of raising another ; and, therefore, the sub- 
traction of a product must needs diminish, instead of augmenting, 
productive power. 

It may be urged that the pressure of taxation impels the pro- 
ductive classes to redouble their exertions, and thus tends to 
enlarge the national production. I answer that, in the first 
place, mere exertion cannot alone produce; there must be capi- 
tal for it to work upon, and capital is but an accumulation of the 
very products that taxation takes from the subject : that, in the 
second place, it is evident, that the values which industry creates 
expressly to satisfy the demands of taxation, are no increase of 
wealth ; for they are seized on and devoured by taxation. It is a 
glaring absurdity to pretend that taxation contributes to national 
wealth, by engrossing part of the national produce ; and enriches 
the nation by consuming part of its wealth. Indeed, it would be 
trifling with my reader's time to notice such a fallacy, did not 
most governments act upon this principle, and had not ,well- 
intentioned and scientific writers endeavored to support and 
establish it. 

If from the circumstance that the nations most grievously 
taxed are those most abounding in wealth, as Great Britain for 
example, we are desired to infer, that their superior wealth arises 

for escape, was the real cause for the improvement. Bastable, Public Finance, 
286. — Ed. 

1 Traite d'economie politique, Bk. Ill, ch. 8. 



228 SELECTED READINGS IN PUBLIC FINANCE 

from their heavier taxation, it would be a manifest inversion of 
cause and effect. A man is not rich because he pays largely ; 
but he is able to pay largely, because he is rich. It would be 
not a little ridiculous, if a man should think to enrich himself by 
spending largely, because he sees a rich neighbor doing so. It 
must be clear that the rich man spends because he is rich, but 
never can enrich himself by the act of spending. 

Cause and effect are easily distinguished-, when they occur 
in succession ; but are often confounded, when the operation is 
continuous and simultaneous. 

Hence, it is manifest that, although taxation may be, and 
often is, productive of good, when the sums it absorbs are 
properly applied, yet, the act of levying is always attended with 
mischief at the outset. And this mischief good princes and 
governments have always endeavored to render as inconsider- 
able to their subjects as possible, by the practice of economy, 
and by levying, not to the full extent of the people's ability, but 
to such extent only as is absolutely unavoidable. That rigid 
economy is the rarest of princely virtues, is owing to the circum- 
stance of the throne being constantly beset with individuals, who 
are interested in the absence of it ; and who are always endeavor- 
ing, by the most specious reasoning, to impress the conviction 
that magnificence is conducive to public prosperity and that 
profuse public expenditure is beneficial to the state. It is 
the object of this third book to expose the absurdities of such 
representations. 

34. The Source of Taxation. — Adam Smith declared that 
taxes are generally paid out of " the revenue of private people " 
and do not ordinarily occasion " the destruction of any actually 
existing capital." Loans, however, he believed to be raised out 
of the previously accumulated wealth of society so that they are 
derived from capital and not from revenue.^ From this sugges- 
tion David Ricardo, a generation later, developed his elaborate 
argument that income, or revenue, should be the normal source 
of taxation. He said : ^ 

1 Wealth of Nations, Bk. V, ch. 3. 

2 Principles of Political Economy and Taxation, ch. 8 (181 7). 



PROPOSITIONS CONCERNING TAXATION 229 

Taxes are a portion of the produce of the land and labor 
of a country, placed at the disposal of the government ; and are 
always ultimately paid, either from the capital, or from the 
revenue of the country. 

We have already shown how the capital of a country is either 
fixed or circulating, according as it is of a more or less durable 
nature. It is difficult to define strictly, where the distinction 
between circulating and fixed capital begins ; for there are 
almost infinite degrees in the durability of capital. The food 
of a country is consumed and reproduced at least once in every 
year ; the clothing of the laborer is probably not consumed 
and reproduced in less than two years ; whilst his house and 
furniture are calculated to endure for a period of ten or twenty 
years. 

When the annual productions of a country more than replace 
its annual consumption, it is said to increase its capital ; when 
its annual consumption is not at least replaced by its annual 
production, it is said to diminish its capital. Capital may there- 
fore be increased by an increased production, or by a diminished 
unproductive consumption. 

If the consumption of the government, when increased by 
the levy of additional taxes, be met either by an increased pro- 
duction, or by a diminished consumption on the part of the peo- 
ple, the taxes will fall upon revenue, and the national capital 
will remain unimpaired ; but if there be no increased production 
or diminished unproductive consumption on the part of the peo- 
ple, the taxes will necessarily fall on capital ; that is to say, they 
will impair the fund allotted to productive consumption.^ 

In proportion as the capital of a country is diminished, its 
productions will be necessarily diminished; and, therefore, if 
the same unproductive expenditure on the part of the people 

1 It must be understood that all the productions of a country are consumed ; but 
it makes the greatest difference imaginable whether they are consumed by those who 
reproduce, or by those who do not reproduce another value. When we say that 
revenue is saved, and added to capital, what we mean is, that the portion of revenue, 
so said to be added to capital, is consumed by productive instead of unproductive 
laborers. There can be no greater error than in supposing that capital is increased 
by non-consumption. If the price of labor should rise so high, that notwithstand- 
ing the increase of capital, no more could be employed, I should say that such 
increase of capital would be still unproductively consumed. 



230 SELECTED READINGS IN PUBLIC FINANCE 

and of the government continue, with a constantly diminishing 
annual reproduction, the resources of the people and of the 
state will fall away with increasing rapidity, and distress and 
ruin will follow. 

Notwithstanding the immense expenditure of the English 
government during the last twenty years,i there can be little 
doubt but that the increased production on the part of the peo- 
ple has more than compensated for it. The national capital has 
not merely been unimpaired, it has been greatly increased, and 
the annual revenue of the people, even after the payment of 
their taxes, is probably greater at the present time than at any 
former period of our history. 

For the proof of this we might refer to the increase of popu- 
lation — to the extension of agriculture — to the increase of 
shipping and manufactures — to the building of docks — to the 
opening of numerous canals, as well as to many other expensive 
undertakings ; all denoting an increase both of capital and of 
annual production. 

Still, however, it is certain that but for taxation this increase 
of capital would have been much greater. There are no taxes 
which have not a tendency to lessen the power to accumulate. 
If they encroach on capital, they must proportionably diminish 
that fund by whose extent the extent of the productive industry 
of the country must always be regulated ; and if they fall on 
revenue, they must either lessen accumulation, or force the con- 
tributors to save the amount of the tax, by making a correspond- 
ing diminution of their former unproductive consumption of the 
necessaries and luxuries of life. Some taxes will produce these 
effects in a much greater degree than others ; but the great evil 
of taxation is to be found, not so much in any selection of its 
objects, as in the general amount of its effects taken collectively. 

Taxes are not necessarily taxes on capital, because they are 
laid on capital ; nor on income, because they are laid on income. 
If from my income of ;£iooo per annum, I am required to pay 
;£ioo, it will really be a tax on my income, should I be content 
with the expenditure of the remaining ^900; but it will be a 
tax on capital, if I continue to spend ^1000. 

The capital from which my income of ;£iooo is derived may 

1 (1793-1S15.) 



PROPOSITIONS CONCERNING TAXATION 231 

be of the value of ;£ 10,000 ; a tax of one per cent on such capi- 
tal would be ;^ioo; but my capital would be unaffected, if after 
paying this tax, I in Hke manner contented myself with the 
expenditure of ;£900. 

The desire which every man has to keep his station in life, 
and to maintain his wealth at the height which it has once 
attained, occasions most taxes, whether laid on capital or on 
income, to be paid from income ; and therefore as taxation pro- 
ceeds, or as government increases its expenditure, the annual 
enjoyments of the people must be diminished, unless they are 
enabled proportionally to increase their capitals and income. 

It should be the policy of governments to encourage a dis- 
position to do this in the people, and never to lay such taxes as 
will inevitably fall on capital ; since by so doing, they impair 
the funds for the maintenance of labor, and thereby diminish 
the future production of the country. 

In England this policy has been neglected, in taxing the pro- 
bates of wills, in the legacy duty, and in all taxes affecting the 
transference of property from the dead to the living. If a legacy 
of ;£'iooo be subject to a tax of ;£ioo, the legatee considers his 
legacy as only ^900 and feels no particular motive to save the 
£100 duty from his expenditure, and thus the capital of the 
country is diminished ; but if he had really received ;£iooo, and 
had been required to pay £100 as a tax on income, on wine, 
on horses, or on servants, he would probably have diminished, 
or rather not increased his expenditure by that sum, and the 
capital of the country would have been unimpaired. 

In 1848 John Stuart Mill criticised Ricardo's doctrine at 
several points.^ He said : ^ 

In addition to the preceding rules, another general rule of 
taxation is sometimes laid down, namely, that it should fall on 
income, and not on capital. That taxation should not encroach 
upon the amount of the national capital, is indeed of the great- 
est importance ; but this encroachment, when it occurs, is not 
so much a consequence of any particular mode of taxation, as 

^ In a subsequent chapter (sec. 77) a further criticism of Smith and Ricardo is 
presented. 2 Principles of Political Economy, Bk. V, ch. 2, § 7. 



232 SELECTED READINGS IN PUBLIC FINANCE 

of its excessive amount. Overtaxation, carried to a sufficient 
extent, is quite capable of ruining the most industrious com- 
munity, especially when it is in any degree arbitrary, so that the 
payer is never certain how much or how little he shall be allowed 
to keep ; or when it is so laid on as to render industry and 
economy a bad calculation. But if these errors be avoided, and 
the amount of taxation be not greater than it is at present, even 
in the most heavily taxed country of Europe, there is no danger 
lest it should deprive the country of a portion of its capital. 

To provide that taxation shall fall entirely on income, and not 
at all on capital, is beyond the power of any system of fiscal 
arrangements. There is no tax which is not partly paid from what 
would otherwise have been saved ; no tax, the amount of which, 
if remitted, would be wholly employed in increased expenditure, 
and no part whatever laid by as an addition to capital. All 
taxes, therefore, are in some sense partly paid out of capital ; 
and in a poor country it is impossible to impose any tax which 
will not impede the increase of the national wealth. But in a 
country where capital abounds, and the spirit of accumulation 
is strong, this effect of taxation is scarcely felt. Capital having 
reached the stage in which, were it not for a perpetual succes- 
sion of improvements in production, any further increase would 
soon be stopped — and having so strong a tendency even to out- 
run those improvements, that profits are only kept above the 
minimum by emigration of capital, or by a periodical sweep 
called a commercial crisis ; to take from capital by taxation what 
emigration would remove, or a commercial crisis destroy, is only 
to do what either of those causes would have done, namely, to 
make a clear space for further saving. 

I cannot, therefore, attach any importance, in a wealthy 
country, to the objection made against taxes on legacies and 
inheritances, that they are taxes on capital. It is perfectly true 
that they are so. As Ricardo observes, if ^loo are taken from 
any one in a tax on houses or on wine, he will probably save it, 
or a part of it, by living in a cheaper house, consuming less 
wine, or retrenching from some other of his expenses : but if 
the same sum be taken from him because he has received a 
legacy of ;£"iooo, he considers the legacy as only ;£900, and 
feels no more inducement than at any other time (probably feels 



PROPOSITIONS CONCERNING TAXATION 233 

rather less inducement) to economize in his expenditure. The 
tax, therefore, is wholly paid out of capital : and there are 
countries in which this would be a serious objection. But in 
the first place, the argument cannot apply to any country which 
has a national debt, and devotes any portion of revenue to pay- 
ing it off; since the produce of the tax, thus applied, still 
remains capital, and is merely transferred from the taxpayer to 
the fundholder. But the objection is never applicable in a 
country which increases rapidly in wealth. The amount which 
would be derived, even from a very high legacy duty, in each 
year, is but a small fraction of the annual increase of capital in 
such a country ; and its abstraction would but make room for 
saving to an equivalent amount : while the effect of not taking 
it, is to prevent that amount of saving, or cause the savings, 
when made, to be sent abroad for investment. A country which, 
like England, accumulates capital not only for itself but for 
half the world, may be said to defray the whole of its public 
expenses from its overflowings ; and its wealth is at this moment 
as great as if it had no taxes at all. What its taxes really do is, 
to subtract from its means, not of production but of enjoyment ; 
since whatever any one pays in taxes, he could, if it were not 
taken for that purpose, employ in indulging his ease, or in grati- 
fying some want or taste which at present remains unsatisfied. 



CHAPTER IX 

JUSTICE IN TAXATION : PROPORTIONAL VS. PROGRESS- 
IVE TAXATION 

35. The Views of Say and McCulloch. — Adam Smith, it will 
be remembered, had laid it down, as the first canon of taxation, 
that the ** subjects of every state ought to contribute toward the 
support of the government, as nearly as possible in proportion to 
their respective abilities ; that is, in proportion to the revenue 
which they respectively enjoy under the protection of the state. 
In the observation or neglect of this maxim consists what is called 
the equality or inequality of taxation." His successors carried on 
a lively debate as to what constitutes equality, and, particularly, 
whether a progressive or proportional rate of taxation corre- 
sponds most nearly to the demands of justice. Jean Baptiste 
Say, for instance, argued for progressive rates of taxation. He 
said : ^ 

Taxation, being a burden, must needs weigh lightest on each 
individual when it bears upon all alike. When it presses 
inequitably upon one individual or branch of industry, it is an 
indirect, as well as a direct, incumbrance; for it prevents the 
particular branch or the individual from competing on even 
terms with the rest. An exemption, granted to one manufac- 
ture, has often been the ruin of several others. Favor to one is 
most commonly injustice to all others. 

The partial assessment of taxation is no less prejudicial to the 
public revenue than unjust to individual interests. Those who 
are too Hghtly taxed are not likely to cry out for an increase ; 
and those who are too heavily taxed are seldom regular in their 
payments. The public revenue suffers in both ways. 

1 Traite d'economie politique, Bk. Ill, ch. 3» 
234 



JUSTICE IN TAXATION 235 

It has been questioned whether it be just to tax that portion 
of revenues which is spent on luxuries more heavily than that 
spent on objects of necessity. It seems but reasonable to do 
so ; for taxation is a sacrifice to the preservation of society and 
of social organization, which ought not to be purchased by the 
destruction of individuals. Yet the privation of absolute nec- 
essaries implies the extinction of existence. It would be some- 
what bold to maintain, that a parent is bound in justice to stint 
the food or clothing of his child to furnish his contingent to the 
ostentatious splendor of a court or the needless magnificence 
of public edifices. Where is the benefit of social institutions to 
an individual whom they rob of an object of positive enjoyment 
or necessity in actual possession, and offer nothing in return but 
the participation in a remote and contingent good which any 
man in his senses would reject with disdain ? 

But how is the line to be drawn between necessaries and 
superfluities ? In this discrimination there is the greatest diffi- 
culty ; for the terms, necessaries and superfluities, convey no 
determinate or absolute notion, but always have reference to 
the time, the place, the age, and the condition of the party ; so 
that, were it laid down as a general rule, to tax none but super- 
fluities, there would be no knowing where to begin and where 
to stop. All that we certainly know is, that the income of a 
person or a family may be so confined as barely to suffice for 
existence ; and may be augmented from that minimum upward 
by imperceptible gradation, until it embrace every gratification 
of sense, of luxury, or of vanity ; each successive gratification 
being one step further removed from the limits of strict neces- 
sity, until at last the extreme of frivolity and caprice is arrived 
at; so that, if it be desired to tax individual income, in such 
manner as to press lighter in proportion as that income ap- 
proaches to the confines of bare necessity, taxation must not 
only be equitably apportioned, but must press on revenue with 
progressive gravity. 

In fact, supposing taxation to be exactly proportionate to 
individual income, — a tax, let us say, of 10 per cent, — a family 
possessed of 300,000 francs per annum would pay 30,000 francs 
in taxes, leaving a clear residue of 270,000 francs for the family 
expenditure. With such an expenditure, the family could not 



236 SELECTED READINGS IN PUBLIC FINANCE 

only live in abundance, but could still enjoy a vast number of 
gratifications by no means essential to happiness. Whereas 
another family, with an income of 300 francs, reduced by taxa- 
tion to 270 francs per annum, would, with our present habits of 
life and ways of thinking, be stinted in the bare necessaries of 
subsistence. Thus a tax merely proportionate to individual 
income would be far from equitable ; and this is probably what 
Smith meant, by declaring it reasonable, that the rich man 
should contribute to the public expenses not merely in propor- 
tion to the amount of his revenue, but even somewhat more. 
For my part, I have no hesitation in going further, and saying 
that taxation cannot be equitable unless its ratio is progressive. 

Upon the other hand, John Ramsay McCuUoch contended 
vigorously for proportional taxation, and was inclined to mini- 
mize the importance of considerations of abstract justice in 
matters of taxation. McCulloch wrote : ^ 

There can be no doubt that, were it practicable, the burden 
of taxation should be made to press on individuals in proportion 
to their respective revenues. A, with an income of ;£"iooo a 
year, ought to pay ten times the tax paid by B, who has only 
;^ioo a year, and the latter ten times as much as C, who has 
only a pittance of ^lOp' The state has been ingeniously com- 
pared by M. Thiers to a mutual insurance company, where the 
payments by the members are exactly proportioned to the sums 
they have insured, or to their interests in the company. And 
so it should be with the subjects of government. It is estab- 
lished for the common benefit of all — of those who labor with 
the hand, and of those who labor with the head ; of those to 
whom property has descended, and of those by whom it has 
been acquired; and is alike indispensable to their well-being and 
prosperity. And being so, it necessarily follows that every indi- 
vidual should contribute to its support according to his stake in 
the society, or to his means. This is a plain as well as a sound 
rule ; and it is one that should never be forgotten or overlooked. 

1 Treatise on Taxation, 17-21 (second edition). 

2 It is, perhaps, needless to say that the incomes of the different parties are sup- 
posed to be perpetual, or of the same duration. 



JUSTICE IN TAXATION 237 

Practically, however, it is not possible to attain to anything 
like a perfect equality of taxation ; and provided no tax be 
imposed in the view of trenching on this principle, or of making 
one class or order of people pay more in proportion to their 
means than others, the equality of taxation is of less importance. 
In this, as in most other departments of politics, we have only a 
choice of difficulties ; and what is absolutely right must often 
give way to what is expedient and practicable. It is the busi- 
ness of the legislator to look at the practical influence of dif- 
ferent taxes, and to resort in preference to those by which the 
revenue may be raised with the smallest inconvenience. Should 
the taxes least adverse to the public interests fall on the con- 
tributors according to their respective abilities, it will be an 
additional recommendation in their favor. But the salus 
popiili is in this, as it should be in every similar matter, the 
prime consideration ; and the tax which is best fitted to promote, 
or least opposed to, this great end, though it may not press quite 
equally on the different orders of society, is to be preferred to a 
more equal but otherwise less advantageous tax. Were Smith's 
first maxim restricted to taxes laid directly on property or income, 
it would be quite as true in a practical as in a theoretical point 
of view. Equality is of the essence of such taxes ; and when- 
ever they* cease to be equal, they become partial and unjust. 
But in laying down a practical rule that is to apply to all taxes, 
equality of contribution is an inferior consideration. The dis- 
tinguishing characteristic of the best tax is, not that it is most 
nearly proportioned to the means of individuals, but that it is 
easily assessed and collected, and is, at the same time, most con- 
ducive, air things considered, to the public interests. 

The truth is, that the greater number of taxes, including, we 
believe, every one that is least injurious, are imposed without 
any regard to the equality of their pressure. They consist of 
duties payable by those who use certain articles or exercise 
certain privileges, and by those only. Taxes of this sort, though 
not ^proportioned to the abilities of the consumers, are neither 
partial nor unfair ; and provided they be imposed on proper 
objects, and kept within reasonable limits, they do not appear 
to be open to any good objection. 

We may refer, in illustration of this statement, to the duties 



238 SELECTED READINGS IN PUBLIC FINANCE 

on malt, spirits, wine, and tobacco. These produce a very large 
annual revenue ; and though some of them might, perhaps, be 
advantageously reduced, they appear — supposing them to be 
properly assessed — to be, in all respects, unexceptionable. 
Other duties of this description, such as those on saddle horses, 
carriages, and livery servants, fall only on the more opulent 
classes. But this is not the case with the more productive 
duties ; and it must be admitted that the largest portion of the 
revenue derived from them is paid by the lower and poorer 
orders. This, however, is not, as has been often alleged, a con- 
sequence of the latter being overtaxed, but of their being so very 
numerous that the produce of taxes to which they generally con- 
tribute invariably exceeds the produce of heavier taxes falling 
exclusively on the richer classes. The duties now under con- 
sideration act, in fact, as a species of improved sumptuary laws, 
having all the useful with few or none of the injurious influences 
of these regulations. . . . 

But though it will, perhaps, be generally admitted that rea- 
sonable duties on spirits, tobacco, and such like articles, cannot 
be justly objected to, it may be contended, with some show of 
reasoning, that duties on necessaries, or on bread, butchers' meat, 
salt, tea, sugar, etc., are unjust and unfair, because of their being 
indispensable to the consumption of the poor as well a§ the rich. 
The injury, however, which is done to the poor by moderate 
taxes on necessaries is more apparent than real ; for, as will be 
afterward shown, wages are, in most cases, increased propor- 
tionally to the amount of such taxes. And it commonly, also, 
happens that the quantity of an article used previously to its 
being burdened with a moderate duty, may be diminished, or 
something else be substituted in its stead, or the duty be defrayed 
by the exercise of greater economy or industry, without entail- 
ing any very serious privations on the consumers. 

Without, however, insisting on these considerations, we deny 
that taxes on necessaries can be fairly objected to on the ground 
of their being unjust. They may, if carried to too great a 
height, be oppressive, and they may sometimes, perhaps, be in- 
expedient; but the charge of injustice is not one that can ever 
be truly made against them. Government has nothing to do 
with the means of the parties who buy taxed articles. It has 



JUSTICE IN TAXATION 239 

done its duty when it has imposed equal and moderate taxes on 
the articles best suited to bear taxation. Providence has not 
been charged with injustice because the corn and other articles 
used indifferently by the poor and the rich cost the one class 
as much as they cost the other. And, such being the case, how 
can it be pretended that governments, in laying equal duties on 
these articles, commit injustice ? A rich man will, of course, pay 
taxes, and everything else, with less inconvenience than one who 
is poor. But is that any reason why he should be unfairly 
treated .? or mulcted of a part of his fortune, by being subjected 
to peculiarly high rates of taxation ? Riches are an evidence of 
superior good conduct; for, in the vast majority of cases, they 
are the result either of their possessors having themselves been, 
or of their having succeeded to progenitors who were, compara- 
tively enterprising, industrious, and frugal. The distinction of 
rich and poor is not artificial. It originates in, and is a conse- 
quence of, the differences in the character and economy of 
individuals. A government which should attempt to obliterate 
this ineradicable distinction by varying duties so as to increase 
their pressure on the more opulent classes would be guilty of 
flagrant injustice. And it would, by discouraging the exercise 
of those virtues which are most essential to the public wel- 
fare, do its best to sap the foundations and weaken the springs 
of national prosperity and civihzation. 

So long, therefore, as duties are imposed on proper objects, 
and not carried to too great a height, we have yet to learn on 
what grounds they can be fairly objected to. A revenue must 
be raised by one means or other ; and we are sanguine enough 
to believe that it will be sufficiently demonstrated in the sequel 
that such portion of it as may be raised by consumption duties 
will be the least onerous. 

And, elsewhere,^ McCulloch turned his guns upon Say's 
arguments in favor of progressive taxation : 

It has been contended by Say, and some other economists, 
that taxes on income should be imposed on a graduated scale, 
and made to increase according to the increase of the incomes 
subjected to their operation. And the countenance which has 
been so frequently and cordially given to proposals for the intro- 
1 Treatise on Taxation, 1 39-141 (second edition). 



240 SELECTED READINGS IN PUBLIC FINANCE 

duction of property and income taxes by the more dangerous 
class of politicians has originated in their supposing that they 
might be made to embrace a plan of graduation. And, though 
in the last degree objectionable, it is not to be denied that there 
is something exceedingly plausible in this plan. A tax of 
;£io is said to be more severely felt by the possessor of an 
income of ;£ioo, or of a property of that amount, than a tax of 
£ioo, or ;£iooo, by the possessor of an income or of a property 
of ;£iooo or ;£"io,ooo; and it is argued that, in order fairly to 
proportion the tax to the ability of the contributors, such a 
graduated scale of duty should be adopted as should press lightly 
on the smaller class of properties and incomes, and increase 
according as they become larger and more able to bear taxa- 
tion. We take leave, however, to protest against this proposal, 
which is not more seductive than it is unjust and dangerous. 
No tax on income can be a just tax unless it leaves indi- 
viduals in the same relative condition in which it found them. 
It must of course depress, according to its magnitude, all those 
on whom it falls ; and it should fall on every one in proportion 
to the revenue which he enjoys under the protection of the state.^ 
If it either pass entirely over some classes, or press on some less 
heavily than on others, it is unjustly imposed. Government, in 
such a. case, has plainly stepped out of its proper province, and 
has assessed the tax, not for the legitimate purpose of appropri- 
ating a certain proportion of the revenues of its subjects to the 
public exigencies, but that it might at the same time regulate 
the incomes of the contributors; that is, it might depress one 
class and elevate another. The toleration of such a principle 
would necessarily lead to every species of abuse. That equal 
taxes on property or income are more severely felt by the poorer 
than by the richer classes is undeniable. But the same is true 
of every, payment which does not subvert the existing relations 
among the different orders of society. The hardship in question 
is, in truth, a consequence of the inequality of fortunes, and to 
attempt to alleviate it by adopting a graduated scale of duties 
would really be to impose taxes on the wealthier part of the 
community for the benefit of their less opulent brethren, and 

1 That is, of course, supposing all revenues reduced to the same denomination, or 
to perpetuities. 



JUSTICE IN TAXATION 24 1 

not for the sake of the pubhc revenue. Let it not be supposed 
that the principle of graduation may be carried to a certain 
extent, and then stopped. 

Nullus sejnel ore receptus 
Pollutas patitur sanguis inansnescere fauces. 

The reasons that made the step be taken in the first instance, 
backed as they are sure to be by agitation and clamor, will 
impel you forward. Having once given way, having said that 
a man with ;£5oo a year shall pay 5 per cent, another with 
jE^iooo 10 per cent, and another with ;£2000 20 per cent, on 
what pretense or principle can you stop in your ascending 
scale } Why not take 50 per cent from the man of ;^2000 a 
year, and confiscate all the higher class of incomes before you 
tax the lower } In such matters the maxim of obsta principiis 
should be firmly adhered to by every prudent and honest states- 
man. Graduation is not an evil to be paltered with. Adopt it 
and you will effectually paralyze industry and check accumu- 
lation ; at the same time that every man who has any property 
will hasten, by carrying it out of the country, to protect "it from 
confiscation. The savages described by Montesquieu, who to 
get at the fruit cut down the tree, are about as good financiers 
as the advocates of this sort of taxes. Wherever they are in- 
troduced, security is at an end. Even if taxes on income were 
otherwise the most unexceptionable, the adoption of the prin- 
ciple of graduation would make them about the very worst that 
could be devised. The moment you abandon, in the framing of 
such taxes, the cardinal principle of exacting from all individuals 
the same proportion of their income or of their property, you 
are at sea without rudder or compass, and there is no amount 
of injustice and folly you may not commit. 

36. The Views of John Stuart Mill. — In his Principles of 
Political Economy ^ Mr. Mill considers at some length what con- 
stitutes equality in taxation : 

For what reason ought equality to be the rule in matters of 
taxation } For the reason, that it ought to be so in all affairs of 

1 Bk. V, ch. 2, §§ 2-4. 



242 SELECTED READINGS IN PUBLIC FINANCE 

government. As a government ought to make no distinction of 
persons or classes in the strength of their claims on it, whatever 
sacrifices it requires from them should be made to bear as nearly 
as possible with the same pressure upon all ; which, it must be 
observed, is the mode by which least sacrifice is occasioned on 
the whole. If any one bears less than his fair share of the 
burthen, some other person must suffer more than his share, 
and the alleviation to the one is not, on the average, so great a 
good to him as the increased pressure upon the other is an 
evil. Equality of taxation, therefore, as a maxim of politics, 
means equality of sacrifice. It means apportioning the contri- 
bution of each person toward the expenses of government, so 
that he shall feel neither more nor less inconvenience from his 
share of the payment than every other person experiences from 
his. This standard, like other standards of perfection, cannot 
be completely realized; but the first object in every practical 
discussion should be to know what perfection is. 

There are persons, however, who are not content with the 
general principles of justice as a basis to ground a rule of finance 
upon, but must have something, as they think, more specifically 
appropriate to the subject. What best pleases them is, to re- 
gard the taxes paid by each member of the community as an 
equivalent for value received, in the shape of service to himself ; 
and they prefer to rest the justice of making each contribute in 
proportion to his means, upon the ground that he who has twice 
as much property to be protected, receives, on an accurate calcu- 
lation, twice as much protection, and ought, on the principles of 
bargain and sale, to pay twice as much for it. Since, however, 
the assumption that government exists solely for the protection 
of property, is not one to be deliberately adhered to ; some con- 
sistent adherents of the quid pro quo principle go on to observe, 
that protection being required for person as well as property, 
and everybody's person receiving the same amount of protec- 
tion, a poll tax of a fixed sum per head is a proper equivalent 
for this part of the benefits of government ; while the remaining 
part, protection to property, should be paid for in proportion to 
property. There is in this adjustment a false air of nice adapta- 
tion, very acceptable to some minds. But in the first place, it is 
not admissible that the protection of persons and that of prop- 



JUSTICE IN TAXATION 243 

erty are the sole purposes of government. The ends of govern- 
ment are as comprehensive as those of the social union. They 
consist of all the good, and all the immunity from evil, which 
the existence of government can be made either directly or in- 
directly to bestow. In the second place, the practice of setting 
definite values on things essentially indefinite, and making them 
a ground of practical conclusions, is peculiarly fertile in false 
views of social questions. It cannot be admitted, that to be pro- 
tected in the ownership of ten times as much property is to be 
ten times as much protected. Neither can it be truly said that 
the protection of ;£ioooa year costs the state ten times as much 
as that of ;£ioo a year, rather than twice as much, or exactly as 
much. The same judges, soldiers, sailors, who protect the one 
protect the other; and the larger income does not necessa- 
rily, though it may sometimes, require even more policemen. 
Whether the labor and expense of the protection, or the feel- 
ings of the protected person, or any other definite thing be made 
the standard, there is no such proportion as the one supposed, 
nor any other definable proportion. If we wanted to estimate 
the degrees of benefit which different persons derive from the 
protection of government, we should have to consider who would 
suffer most if that protection were withdrawn : to which question 
if any answer could be made, it must be, that those would suffer 
most who were weakest in mind or body, either by nature or by 
position. Indeed, such persons would almost infallibly be slaves. 
If there were any justice, therefore, in the theory of justice 
now under consideration, those who are least capable of helping 
or defending themselves, being those to whom the protection of 
government is the most indispensable, ought to pay the greatest 
share of its price : the reverse of the true idea of distributive 
justice, which consists not in imitating but in redressing the in- 
equalities and wrongs of nature. 

Government must be regarded as so preeminently a concern 
of all, that to determine who are most interested in it is of no 
real importance. If a person or class of persons receive so 
small a share of the benefit as makes it necessary to raise the 
question, there is something else than taxation which is amiss, 
and the thing to be done is to remedy the defect, instead of 
recognizing it and making it a ground for demanding less taxes. 



244 SELECTED READINGS IN PUBLIC FINANCE 

As, in a case of voluntary subscription for a purpose in which 
all are interested, all are thought to have done their part fairly 
when each has contributed according to his means, that is, has 
made an equal sacrifice for the common object; in like manner 
should this be the principle of compulsory contributions : and it 
is superfluous to look for a more ingenious or recondite ground 
to rest the principle upon. 

Setting out, then, from the maxim that equal sacrifices ought 
to be demanded from all, we have next to inquire whether this 
is in fact done, by making each contribute the same percentage 
on his pecuniary means. Many persons maintain the negative, 
saying that a tenth part taken from a small income is a heavier 
burthen than the same fraction deducted from one much larger : 
and on this is grounded the very popular scheme of what is 
called a graduated property tax, viz. an income tax in which the 
percentage rises with the amount of the income. 

On the best consideration I am able to give to this question, it 
appears to me that the portion of truth which the doctrine con- 
tains arises principally from the difference between a tax which 
can be saved from luxuries, and one which trenches, in ever so 
small a degree, upon the necessaries of life. To take a thou- 
sand a year from the possessor of ten thousand, would not 
deprive him of anything really conducive either to the support 
or to the comfort of existence ; and if such would be the effect 
of taking ;£5 from one whose income is £,^0, the sacrifice 
required from the last is not only greater than, but entirely 
incommensurable with, that imposed upon the first. The mode 
of adjusting these inequalities of pressure which seems to be the 
most equitable, is that recommended by Bentham, of leaving a 
certain minimum of income, sufficient to provide the necessaries 
of life, untaxed. Suppose £,^0 a year to be sufficient to provide 
the number of persons ordinarily supported from a single 
income, with the requisites of life and health, and with protec- 
tion against habitual bodily suffering, but not with any indul- 
gence. This then should be made the minimum, and incomes 
exceeding it should pay taxes not upon their whole amount, but 
upon the surplus. If the tax be lO per cent, an income of £,6o 
should be considered as a net income of £\o, and charged with 
;£i a year, while an income of ^looo should be charged as one 



JUSTICE IN TAXATION 245 

of £gSO- Each would then pay a fixed proportion, not of his 
whole means, but of his superfluities. An income not exceeding 
£SO should not be taxed at all, either directly or by taxes on 
necessaries ; for as by supposition this is the smallest income 
which labor ought to be able to command, the government 
ought not to be a party to making it smaller. This arrangement, 
however, would constitute a reason, in addition to others which 
might be stated, for maintaining taxes on articles of luxury con- 
sumed by the poor. The immunity extended to the income 
required for necessaries, should depend on its being actually 
expended for that purpose; and the poor who, not having more 
than enough for necessaries, divert any part of it to indulgences, 
should like other people contribute their quota out of those in- 
dulgences to the expenses of the state. 

The exemption in favor of the smaller incomes should not, I 
think, be stretched further than to the amount of income need- 
ful for life, health, and immunity from bodily pain. If £^0 
a year is sufficient (which may be doubted) for these purposes, 
an income of ;£ioo a year would, as it seems to me, obtain all 
the relief it is entitled to, compared with one of ;£ 1000, by 
being taxed only on £$0 of its amount. It may be said, indeed, 
that to take ;£ioo from £1000 (even .giving back five pounds) 
is a heavier impost than ;£iooo taken from ^10,000 (giving 
back the same five pounds). But this doctrine seems to me 
too disputable altogether, and even if true at all, not true to a 
sufficient extent, to be made the foundation of any rule of taxa- 
tion. Whether the person with ;£ 10,000 a year cares less for 
;£iooo than the person with only ;£iooo a year cares for ;£ioo, 
and if so, how much less, does not appear to me capable of 
being decided with the degree of certainty on which a legislator 
or a financier ought to act. 

Some indeed contend that the rule of proportional taxation 
bears harder upon the moderate than upon the large incomes, 
because the same proportional payment has more tendency in 
the former case than in the latter to reduce the payer to a lower 
grade of social rank. The fact appears to me more than ques- 
tionable. But even admitting it, I object to its being considered 
incumbent oa government to shape its course by such consider- 
ations, or to recognize the notion that social importance is or 



246 SELECTED READINGS IN PUBLIC FINANCE 

can be determined by amount of expenditure. Government 
ought to set an example of rating all things at their true value, 
and riches, therefore, at the worth, for comfort or pleasure, of 
the things which they will buy : and ought not to sanction the 
vulgarity of prizing them for the pitiful vanity of being known 
to possess them, or the paltry shame of being suspected to be 
without them, the presiding motives of three fourths of the 
expenditure of the middle classes. The sacrifices of real comfort 
or indulgence which government requires, it is bound to appor- 
tion among all persons with as much equality as possible ; but 
their sacrifices of the imaginary dignity, dependent on expense, 
it may spare itself the trouble of estimating. 

Both in England and on the Continent a graduated property 
tax has been advocated, on the avowed ground that the state 
should use the instrument of taxation as a means of mitigating 
the inequalities of wealth. I am as desirous as any one, that 
means should be taken to diminish those inequalities, but not so 
as to relieve the prodigal at the expense of the prudent. To tax 
the larger incomes at a higher percentage than the smaller, is to 
lay a tax on industry and economy; to impose a penalty on 
people for having worked harder and saved more than their 
neighbors. It is not the. fortunes which are earned, but those 
which are unearned, that it is for the public good to place under 
limitation. A just and wise legislation would abstain from hold- 
ing out motives for dissipating rather than saving the earnings' 
of honest exertion. Its impartiality between competitors would 
consist in endeavoring that they should all start fair, and not in 
hanging a weight upon the swift to diminish the distance between 
them and the slow. Many, indeed, fail with greater efforts than 
those with which others succeed, not from difference of merits, 
but difference of opportunities ; but if all were done which it 
would be in the power of a good government to do, by instruc- 
tion and by legislation, to diminish this inequality of opportuni- 
ties, the differences of fortune arising from people's own earnings 
could not justly give umbrage. With respect to the large fortunes 
acquired by gift or inheritance, the power of bequeathing is one 
of those privileges of property which are fit subjects for regula- 
tion on grounds of general expediency ; and I have already sug- 
gested, as a possible mode of restraining the accumulation of large 



JUSTICE IN TAXATION 247 

fortunes in the hands of those who have not earned them by ex- 
ertion, a Hmitation of the amount which any one person should 
be permitted to acquire by gift, bequest, or inheritance. Apart 
from this, and from the proposal of Bentham (also discussed in 
a former chapter) that collateral inheritance in case of intestacy 
should cease, and the property escheat to the state, I conceive 
that inheritances and legacies, exceeding a certain amount, are 
highly proper subjects for taxation: and that the revenue from 
them should be as great as it can be made without giving rise 
to evasions, by donation during life or concealment of property, 
such as it would be impossible adequately to check. The prin- 
ciple of graduation (as it is called,) that is, of levying a larger 
percentage on a larger sum, though its application to general 
taxation would be in my opinion objectionable, seems to me both 
just and expedient as applied to legacy and inheritance duties. 

The objection to a graduated property tax applies in an aggra- 
vated degree to the proposition of an exclusive tax on what is 
called "realized property," that is, property not forming a part 
of any capital engaged in business, or rather in business under 
the superintendence of the owner : as land, the public funds, 
money lent on mortgage, and shares (I presume) in joint-stock 
companies. Except the proposal of applying a sponge to the 
national debt, no such palpable violation of common honesty has 
found sufficient support in this country, during the present gen- 
eration, to be regarded as within the domain of discussion. It 
has not the palliation of a graduated property tax, that of lay- 
ing the burthen on those best able to bear it ; for " realized 
property" includes the far larger portion of the provision made 
for those who are unable to work, and consists, in great part, of 
extremely small fractions. I can hardly conceive a more shame- 
less pretension than that the major part of the property of the 
country, that of merchants, manufacturers, farmers, and shop- 
keepers, should be exempted from its share of taxation ; that 
these classes should only begin to pay their proportion after 
retiring from business, and if they never retire, should be excused 
from it altogether. But even this does not give an adequate idea 
of the injustice of the proposition. The burthen thus exclusively 
thrown on the owners of the smaller portion of the wealth of the 
community, would not even be a burthen on that c/ass of persons 



248 SELECTED READINGS IN PUBLIC FINANCE 

in perpetual succession, but would fall exclusively on those who 
happened to compose it when the tax was laid on. As land and 
those particular securities would thenceforth yield a smaller net 
income, relatively to the general interest of capital and to the 
profits of trade, the balance would rectify itself by a permanent 
depreciation of those kinds of property. Future buyers would 
acquire land and securities at a reduction of price, equivalent to 
the peculiar tax, which tax they would, therefore, escape from 
paying ; while the original possessors would remain burthened 
with it even after parting with the property, since they would 
have sold their land or securities at a loss of value equivalent to 
the fee simple of the tax. Its imposition would thus be tanta- 
mount to the confiscation for public uses of a percentage of their 
property, equal to the percentage laid on their income by the tax. 
That such a proposition should find any favor is a striking 
instance of the want of conscience in matters of taxation, result- 
ing from the absence of any fixed principles in the public mind, 
and of any indication of a sense of justice on the subject in the 
general conduct of governments. Should the scheme ever enlist 
a large party in its support, the fact would indicate a laxity of 
pecuniary integrity in national affairs, scarcely inferior to Ameri- 
can repudiation. 

Whether the profits of trade may not rightfully be taxed at a 
lower rate than incomes derived from interest or rent, is part of 
the more comprehensive question, so often mooted on the occa- 
sion of the present income tax, whether life incomes should be 
subjected to the same rate of taxation as perpetual incomes ; 
whether salaries, for example, or annuities, or the gains of pro- 
fessions, should pay the same percentage as the income from 
inheritable property. 

The existing tax treats all kinds of incomes exactly alike, tak- 
ing its sevenpence (now sixpence) in the pound as well from the 
person whose income dies with him, as from the landholder, 
stockholder, or mortgagee, who can transmit his fortune undi- 
minished to his descendants. This is a visible injustice ; yet it 
does not arithmetically violate the rule that taxation ought to 
be in proportion to means. When it is said that a temporary 
income ought to be taxed less than a permanent one, the reply 
is irresistible, that it is taxed less ; for the income which lasts only 



JUSTICE IN TAXATION 249 

ten years pays the tax only ten years, while that which lasts for- 
ever pays forever. On this point some financial reformers are 
guilty of a great fallacy. They contend that incomes ought to 
be assessed to the income tax not in proportion to their annual 
amount, but to their capitalized value : that, for example, if the 
value of a perpetual annuity of ;£ioo is ;£3000, and a life an- 
nuity of the same amount being worth only half the number of 
years' purchase could only be sold for ;£i5oo, the perpetual 
income should pay twice as much per cent income tax as the 
terminable income ; if the one pays £10 sl year, the other should 
pay only £$. But in this argument there is the obvious over- 
sight, that it values the incomes by one standard and the pay- 
ments by another; it capitalizes the incomes, but forgets to 
capitalize the payments. An annuity worth ;£"3000 ought, it is 
alleged, to be taxed twice as highly as one which is only worth 
;£i500, and no assertion can be more unquestionable; but it is 
forgotten that the income worth ;£3000 pays to the supposed 
income tax ;£io a year in perpetuity, which is equivalent, by 
supposition, to ;£300, while the terminable income pays the same 
;£io only during the life of its owner, which on the same calcu- 
lation is a value of £iSO, and could actually be bought for that 
sum. Already, therefore, the income which is only half as valu- 
able, pays only half as much to the tax ; and if in addition to 
this its annual quota were reduced from ;£io to £$> it would 
pay, not half, but a fourth part only of the payment demanded 
from the perpetual income. To make it just that the one income 
should pay only half as much per annum as the other, it would 
be necessary that it should pay that half for the same period, 
that is, in perpetuity. 

The rule of payment which this school of financial reformers 
contend for, would be very proper if the tax were only to be 
levied once, to meet some national emergency. On the prin- 
ciple of requiring from all payers an equal sacrifice, every 
person who had anything belonging to him, reversioners in- 
cluded, would be called on for a payment proportioned to the 
present value of his property. I wonder it does not occur to 
the reformers in question, that precisely because this principle 
of assessment would be just in the case of a payment made 
once for all, it cannot possibly be just for a permanent tax. 



2 50 SELECTED READINGS IN PUBLIC FINANCE 

When each pays only once, one person pays no oftener than 
another; and the proportion which would be just in that case, 
cannot also be just if one person has to make the payment only 
once, and the other several times. This, however, is the type 
of the case which actually occurs. The permanent incomes pay 
the tax as much oftener than the temporary ones, as a perpe- 
tuity exceeds the certain or uncertain length of time which 
forms the duration of the income for life or years. 

All attempts to establish a claim in favor of terminable 
incomes on numerical grounds — to make out, in short, that a 
proportional tax is not a proportional tax — are manifestly ab- 
surd. The claim does not rest on grounds of arithmetic, but 
of human wants and feelings. It is not because the temporary 
annuitant has smaller means, but because he has greater neces- 
sities, that he ought to be assessed at a lower rate. 

In spite of the nominal equality of income. A, an annuitant 
of ;£iooo a year, cannot so well afford to pay ;£ioo out of it, 
as B, who derives the same annual sum from heritable property, 
A having usually a demand on his income which B has 
not, namely, to provide by saving for children or others, 
to which, in the case of salaries or professional gains, must 
generally be added a provision for his own later years ; while B 
may expend his whole income without injury to his old age, and 
still have it all to bestow on others after his death. If A, in 
order to meet these exigencies, must lay by ;£300 of his income, 
to take ;£ioo from him as income tax is to take ;£ioo from 
;£"700, since it must be retrenched from that part only of his 
means which he can afford to spend on his own consumption. 
Were he to throw it ratably on what he spends and on what 
he saves, abating fyo from his consumption and ;£30 from his 
annual saving, then indeed his immediate sacrifice would be 
proportionally the same as B's : but then his children or his old 
age would be worse provided for in consequence of the tax. 
The capital sum which would be accumulated for them would 
be one tenth less, and on the reduced income afforded by this 
reduced capital, they would be a second time charged with 
income tax; while B's heirs would only be charged once. 

The principle, therefore, of equality of taxation, interpreted 
in its only just sense, equality of sacrifice, requires that a person 



JUSTICE IN TAXATION 251 

who has no means of providing for old age, or for those in 
whom he is interested, except by saving from income, should 
have the tax remitted on all that part of his income which is 
really and bond fide applied to that purpose. 

If, indeed, reliance could be placed on the conscience of 
the contributors, or sufficient security taken for the correctness 
of their statements by collateral precautions, the proper mode 
of assessing an income tax would be to tax only the part of 
income devoted to expenditure, exempting that which is saved. 
For when saved and invested (and all savings, speaking gener- 
ally, are invested), it thenceforth pays income tax on the interest 
or profit which it brings, notwithstanding that it has already 
been taxed on the principal. Unless, therefore, savings are 
exempted from income tax, the contributors are twice taxed on 
what they save, and only once on what they spend. A person 
who spends all he receives pays jd. in the pound, or say 3 per 
cent, to the tax, and no more ; but if he saves part of the year's 
income and buys stock, then in addition to the 3 per cent which 
he has paid on the principal, and which diminishes the interest 
in the same ratio, he pays 3 per cent annually on the interest 
itself, which is equivalent to an immediate payment of a second 
3 per cent on the principal. So that while unproductive ex- 
penditure pays only 3 per cent, savings pay 6 percent; or more 
correctly, 3 per cent on the whole, and another 3 per cent on the 
remaining 97. The difference thus created to the disadvan- 
tage of prudence and economy, is not only impolitic but unjust. 
To tax the sum invested, and afterward tax also the proceeds 
of the investment, is to tax the same portion of the contributor's 
means twice over. The principal and the interest cannot both 
together form part of his resources ; they are the same portion 
twice counted : if he has the interest, it is because he abstains 
from using the principal ; if he spends the principal, he does not 
receive the interest. Yet because he can do either of the two, 
he is taxed as if he could do both, and could have the benefit of 
the saving and that of the spending, concurrently with one 
another. 

It has been urged as an objection to exempting savings from 
taxation, that the law ought not to disturb, by artificial inter- 
ference, the natural competition between the motives for saving 



252 SELECTED READINGS IN PUBLIC FINANCE 

and those for spending. But we have seen that the law dis- 
turbs this natural competition when it taxes savings, not when 
it spares them; for as the savings pay at any rate the full tax as 
soon as they are invested, their exemption from payment in the 
earlier stage is necessary to prevent them from paying twice, 
while money spent in unproductive consumption pays only once. 
It has been further objected, that since the rich have the great- 
est means of saving, any privilege given to savings is an advan- 
tage bestowed on the rich at the expense of the poor. I answer, 
that it is bestowed on them only in proportion as they abdicate 
the personal use of their riches ; in proportion as they divert 
their income from the supply of their own wants, to a produc- 
tive investment, through which, instead of being consumed by 
themselves, it is distributed in wages among the poor. If this 
be favoring the rich, I should like to have it pointed out, what 
mode of assessing taxation can deserve the name of favoring 
the poor. 

No income tax is really just, from which savings are not 
exempted ; and no income tax ought to be voted without that 
provision, if the form of the returns, and the nature of the evi- 
dence required, could be so arranged as to prevent the exemp- 
tion from being taken fraudulent advantage of, by saving with 
one hand and getting into debt with the other, or by spending 
in the following year what had been passed tax free as saving 
in the year preceding. If this difficulty could be surmounted, 
the difficulties and complexities arising from the comparative 
claims of temporary and permanent incomes, would disappear ; 
for since temporary incomes have no just claim to lighter taxa- 
tion than permanent incomes, except in so far as their possessors 
are more called upon to save, the exemption of what they do 
save would fully satisfy the claim. But if no plan can be de- 
vised for the exemption of actual savings, sufficiently free from 
liability to fraud, it is necessary, as the next thing in point of 
justice, to take into account in assessing the tax, what the differ- 
ent classes of contributors ought to save. And there would 
probably be no other mode of doing this than the rough expe- 
dient of two different rates of assessment. There would be 
great difficulty in taking into account differences of duration 
between one terminable income and another; and in the most 



JUSTICE IN TAXATION 253 

frequent case, that of incomes dependent on life, differences of 
age and health would constitute such extreme diversity as it 
would be impossible to take proper cognizance of. It would 
probably be necessary to be content with one uniform rate for 
all incomes of inheritance, and another uniform rate for all those 
which necessarily terminate with the life of the individual. In 
fixing the proportion between the two rates, there must inevi- 
tably be something arbitrary ; perhaps a deduction of one fourth 
in favor of life incomes would be as little objectionable as any 
which could be made, it being thus assumed that one fourth of a 
Ufe income is, on the average of all ages and states of health, a 
suitable proportion to be laid by as a provision for successors 
and for old age. 

Of the net profits of persons in business, a part, as before 
observed, may be considered as interest on capital, and of a per- 
petual character, and the remaining part as remuneration for the 
skill and labor of superintendence. The surplus beyond inter- 
est depends on the life of the individual, and even on his 
continuance in business, and is entitled to the full amount of ex- 
emption allowed to terminable incomes. It has also, I conceive, 
a just claim to a further amount of exemption in consideration 
of its precariousness. An income which some not unusual vicis- 
situde may reduce to nothing, or even convert into a loss, is not 
the same thing to the feelings of the possessor as a permanent 
income of ;£iooo a year, even though on an average of years it 
may yield ;£iooo a year. If life incomes were assessed at three 
fourths of their amount, the profits of business, after deducting 
interest on capital, should not only be assessed at three fourths, 
but should pay, on that assessment, a lower rate. Or perhaps 
the claims of justice in this respect might be sufficiently met by 
allowing the deduction of a fourth on the entire income, interest 
included. 

These are the chief cases, of ordinary occurrence, in which 
any difficulty arises in interpreting the maxim of equality of 
taxation. The proper sense to be put upon it, as we have seen 
in the preceding example, is, that people should be taxed, not in 
proportion to what they have, but to what they can afford to 
spend. It is no objection to this principle that we cannot apply 
it consistently to all cases. A person with a life income and 



254 ■ SELECTED READINGS IN PUBLIC FINANCE 

precarious health, or who has many persons depending on his 
exertions, must, if he wishes to provide for them after his death, 
be more rigidly economical than one who has a life income of 
equal amount, with a strong constitution, and few claims upon 
him ; and if it be conceded that taxation cannot accommodate 
itself to these distinctions, it is argued that there is no use in 
attending to any distinctions, where the absolute amount of in- 
come is the same. But the difficulty of doing perfect justice, is 
no reason against doing as much as we can. Though it may be 
a hardship to an annuitant whose life is only worth five years' 
purchase, to be allowed no greater abatement than is granted to 
one whose life is worth twenty, it is better for him even so, than 
if neither of them were allowed any abatement at all. 

37, Wagner's Socio-political Theory of Taxation. — A radi- 
cally different point of departure is represented by the eminent 
German economist, Adolph Wagner, who distinguishes between 
the purely fiscal and the socio-political theories of justice in 
taxation. In earlier times, Wagner says, financial problems 
were treated from the purely fiscal point of view, that is, with a 
view solely to raising a sufficient revenue to meet the needs of 
the government. But the modern view, he says,^ is, or should 
be, different: 

The modern science of economics not only recognizes the 
mutual dependence of public and private economic activity, and 
their mutually complementary character ; it also renounces the 
optimistic view of the present organization of private industry, 
and recognizes the great evils in the system of free competition. 
It has come to know that the organization of productive industry 
by private initiative, the existing institution of property — espe- 
cially in land and productive capital, and the distribution of 
wealth which takes place upon this basis, have a decisive social 
influence. It knows that through this process the power and 
relations both of individuals and of classes are determined in 
modern economic society. At the same time our science recog- 
nizes the influence which the state exercises directly or indirectly 

1 Finanzwissenschaft, Vol. I, § 27. 



JUSTICE IN TAXATION 255 

upon the distribution of wealth and position of social classes, by 
the form which its activity takes, by the manner in which it 
spends its revenues, by the kinds of taxation it adopts, and by 
the creation of public debts. 

From this knowledge our science has developed two demands. 
In the first place, the state should so order its expenditures, tax 
system, and loans as to remove certain economic and social evils 
which have attended them in the past. And in the second 
place, the state, by adopting appropriate policies, should remedy 
evils which are not due to its previous action in financial or other 
matters. From this second demand it follows that, in the 
domain of public finance, expenditures should increase in order 
to enable the state to assume new functions; and that taxation, 
in addition to serving the purely financial purpose of providing 
sufficient revenue, should be employed for the purpose of bring- 
ing about a different distribution of wealth from that which 
would result from the working of free competition upon the 
basis of the present social order. It is the modern " social 
problem," influencing both scientific and public affairs, which is 
here beginning to work this transformation in the science of 
finance. 

Later on Professor Wagner discusses, from his " socio-politi- 
cal" point of view, the question of justice in taxation. He says 
that one's views on this subject will depend upon what one 
thinks of that distribution of wealth which free competition 
would bring about upon the basis of the existing economic order. 
Thus he continues : ^ 

One who considers the present economic order unconditionally 
just, and the only justifiable order, as the liberal school of the 
Physiocrats and Smith did, must logically consider the existing 
distribution of wealth, which results from this order, as the only 
righteous and just distribution. This conclusion the keener 
thinkers of the school have drawn and definitely formulated. 
For a person of this opinion the existing distribution of wealth 
is, therefore, a fact admitting of no further discussion and to be 
accepted with all of its consequences. One of these consequences 

1 Finanzwissenschaft, Vol. II, § 159. 



256 SELECTED READINGS IN PUBLIC FINANCE 

is that the expenditure of the same amount of money presses 
with unequal severity upon persons with different incomes and 
in different economic circumstances ; or, conversely, that the 
ability of these persons to bear the same expenditure varies 
according to the conditions just mentioned. It follows, then, 
that taxation should not alter the existing distribution, which is 
considered to be just. In this view of the case, therefore, taxa- 
tion will be confined strictly to the purpose of raising sufficient 
revenue ; and the socio-political theory of taxation, which has 
already been stated, will be rejected. 

The consequences of this view, so far as the concept of justice 
and the demand for universality and equality in taxation are 
concerned, is briefly as follows : 

1. The duty of all to pay taxes (universality) is interpreted 
literally. Every citizen is required, as a matter of principle, to 
pay taxes, whether his income is small or large, whether it is 
derived from invested property or from personal exertions. 
There should be no exemption of the " minimum of subsistence." 

2. Equality in taxation is believed to be proportionality of 
taxes to income ; that is, every one should pay in taxes the same 
proportion of his income. The result is proportional taxation, 
or levying the same per cent upon all incomes, and the rejection 
of progressive taxation of the larger incomes, as well as the 
equal taxation of funded and unfunded incomes. . . . 

The theory thus briefly, but sufficiently, sketched may be 
called the purely financial or fiscal theory of taxation, in order 
to distinguish it from the theory now to be presented. The 
correctness of the conclusion concerning universality and justice 
of taxation is not to be questioned if the premise is conceded to 
be true. This premise is the j ustice of the distribution of wealth 
brought about by free competition. The conclusion stands or 
falls with the premise. 

Again referring to my earlier discussion of competition in my 
Grundlegung,^ discussion which cannot be repeated here, it is 
to be said that the premise cannot be admitted to be true, — at 
least in the universal application given it by the liberal school 
of economics. . . . Therefore the conclusion that the distribu- 
tion established by competition is not to be disturbed by taxa- 

^ Grundlegung der politischen Oekonomie, especially Bk. V, ch. 2. — Ed. 



JUSTICE IN TAXATION 257 

tion, is not universally true. We need, rather, beside the purely 
financial theory of taxation, to establish a second, — the socio- 
political, by which a tax becomes something more than a means 
of raising revenue, and is considered a means of correcting that 
distribution of wealth which results from competition. This is to 
be brought about particularly by discriminating as sharply as pos- 
sible between "earned" incomes and incomes resulting from 
chance or speculative gains. . . . And then, with the incomes 
drawn from ordinary industry, we must distinguish more 
sharply between income derived from labor and income de- 
rived from property; and we must consider that the larger 
gains, and the accumulation of property which they render 
possible, usually result more or less from good fortune as 
well as from the personal contributions of the recipients. 
Furthermore, only from the socio-political standpoint can 
due consideration be given to the undeniable fact that the 
larger incomes represent greater ability to pay taxes than 
the smaller incomes represent, and that income from property 
indicates greater ability than income from labor. And, finally, 
from this standpoint, can be justified the policy of favoring 
classes of persons with small and precarious incomes or incomes 
derived wholly from labor, by means of certain exemptions from 
taxation. Such exemptions necessarily lead to higher taxation 
of the wealthier classes, but they are, from this standpoint, 
quite as justifiable as the institutions already maintained, at pub- 
lic expense, for the benefit of the poorer classes, such as schools. 
So far as concerns the postulates of universality and equal- 
ity in taxation, the results of the socio-political theory are as 
follows : 

1. Universality is not interpreted literally, even for those 
who are members of the state. It permits the exemption of 
persons with small incomes, especially incomes derived from 
labor, from taxation in general or from the operation of certain 
taxes. This is the social demand for the exemption of a mini- 
mum of subsistence. ... 

2. Equality is, in this theory, considered to mean taxation as 
far as possible in proportion to ability to contribute, which 
increases more rapidly than the absolute amount of a person's 
income or property increases. Therefore the socio-political 



258 SELECTED READINGS IN PUBLIC FINANCE 

theory demands progressive taxation of larger incomes and the re- 
jection of mere proportional taxation. Furthermore it demands 
heavier taxation of funded incomes than of incomes derived 
from labor. . . . And, in strictness, only upon this socio- 
political theory can the taxation of inheritances find adequate 
justification. For, according to it, the rights of property and 
inheritance are not mere matters of course and wholly inde- 
pendent of the action of the state, as the liberal school believes 
them to be. These things are, on the contrary, a product of the 
legal activity of the state. 

, 38. Professor Seligman's Criticism of Wagner's Theories. — 

The socio-political theory of taxation is vigorously criticised by 
Professor Seligman in his work on Progressive Taxation : ^ 

: The foremost scientific advocate of the socialistic theory of 
progression is the German economist, Adolph Wagner. Wag- 
ner distinguishes between the purely fiscal period in the history 
of public finance, and the socio-political period. The essence of 
the first period consists in the simple endeavor on the part of the 
government to raise a revenue adequate to its needs. The 
essence of the second period consists in the predominance of 
social reasons over purely fiscal reasons. The state is no 
longer satisfied merely with raising an adequate revenue, but 
now considers it a duty to interfere with the rights of private 
property in order to bring about a more equitable distribution 
of wealth. The fiscal policy looks merely to the needs of the 
administration ; the socio-political policy looks at the relations 
of social classes to each other, and the best methods of satisfac- 
torily adjusting these relations. The fiscal policy necessarily 
results in proportional taxation ; the socio-political policy results 
in progressive taxation. The ethical demands of modern civili- 
zation are everywhere preparing the way for a transition from 
the old fiscal period to the incipient socio-political period. It is 
these ethical or social reasons alone which can logically serve as 
a basis for progressive taxation. 

1 Progressive Taxation in Theory and Practice, 66-70. In Publications of the 
American Economic Association, IX (1894). Reprinted by consent of the author 
and the Association. 



JUSTICE IN TAXATION 259 

This distinction of Wagner is, however, entirely baseless. It 
is not true historically that the tax policy of various nations has 
been adjusted solely with reference to purely fiscal reasons. All 
governments have allowed social considerations in the wider 
sense to influence their revenue policy. The whole system of 
protective duties has been framed not merely with reference to 
revenue considerations, but in order to produce results which 
should directly affect social and national prosperity. Taxes on 
luxuries have often been mere sumptuary laws designed as 
much to check consumption as to yield revenue. Excise taxes 
have frequently been levied from a wide social, as well as from a 
narrow fiscal, standpoint. From the very beginning of all tax sys- 
tems these social reasons have often been present. The attempt 
to sharply distinguish such periods historically is, therefore, 
unsuccessful. 

But, on the other hand, it is not allowable to confound this 
undoubtedly social element in all fiscal policy with what Wag- 
ner calls the socio-political, or what may be called more cor- 
rectly the socialistic, element. From the principle that the state 
may modify its strict fiscal policy by considerations of general 
national utility to the principle that it is the duty of the state to 
redress all inequalities of fortune among its private citizens is a 
long and dangerous step. It would land us not only in socialism, 
but practically in communism. If this were one of the acknowl- 
edged functions of government, it would be useless to construct 
any science of finance. There would be only one simple princi- 
ple : confiscate the property of the rich and give it to the poor. 

The difference between the social element and Wagner's socio- 
political idea is the difference between social reform and social- 
ism. We may indeed deprecate the existing conditions which 
affect the distribution of wealth. But where so much is spoken 
of just and unjust arrangements, it is necessary to come to an 
understanding exactly what justice means. Justice, in so far as 
the action of the state is concerned, consists in holding the bal- 
ance equal ; in giving none an undue advantage ; in affording 
each individual equal rights before the law and equal oppor- 
tunities to develop his own talents and resources. Justice indeed 
demands that the state should do nothing consciously and pur- 
posely to increase inequality of wealth ; but it cannot demand 



26o SELECTED READINGS IN PUBLIC FINANCE 

that the state should do away with inequality of wealth. Justice 
in the sense of equality may demand great changes in the exist- 
ing forms of taxation ; but that is a question by itself. It in- 
volves the problem of the equal treatment of all, as over against 
historic inequality and its survivals in the tax systems of the 
world to-day. In that sense indeed there is room and need for 
social reform ; but it is a reform which consists in checking the 
continuance of old unequal laws, not in fostering the growth of 
new unequal laws. Legal justice means legal equality ; but a 
legal equality which would attempt to force an equality of for- 
tune in the face of inevitable inequalities of native ability would 
be a travesty of justice. 

We may indeed grant the crying need for social reform. But 
in so far as the government is concerned the possibility of social 
reform lies rather in the general attitude of the legislator in 
social and industrial matters. And even in so far as finance 
is concerned, the chief social reforms are in the domain of 
outlay and expenditure rather than in that of revenue. The 
desirable social reforms consist in extending the benefits of gov- 
ernmental activity to the poor and needy, and in enabling even 
the lowest classes to participate, as far as possible, in the 
advantages of progressive civilization. Even here it is a ques- 
tion how far it is desirable to go ; and the answer depends not 
alone on fiscal reasons, but also on wider considerations of gen- 
eral governmental policy. But at all events, the so-called socio- 
political theory is untenable in so far as it implies a conscious 
effort on the part of the state to levy higher taxes on the rich in 
order to reduce them to the level of the poor. 

39. Professor Seligman's Views concerning Progressive Taxa- 
tion. — Rejecting in toto, therefore, the theories of Wagner, 
Professor Seligman, after an exhaustive examination of the 
literature on the subject, presents his own views as follows: ^ 

We have thus far learned the chief arguments urged for and 
against progressive taxation. We have seen the inadequacy of 
the socialistic and compensatory theories in favor of, and the 
weakness of the benefit theory in opposition to, the doctrine of 

1 Progressive Taxation, 190-200. 



JUSTICE IN TAXATION 26 1 

progression. And we have analyzed more closely the equal- 
sacrifice doctrine, and found that it is unable to serve as the 
basis of a definite and infallible scale of progression. Are we, 
then, to abandon progressive taxation in theory.? It seems to 
me not, and for a convincing reason. We must revert to the 
fundamental conception of faculty or ability, which is, after all, 
the best standard we have of the measure of general obligation 
to pay taxes. What does the faculty theory in its wisest inter- 
pretation teach us in the matter ? 

President Walker's definition of faculty is well known. ^ 
Faculty, says he, is " the native or acquired power of produc- 
tion." But if we analyze faculty more closely, in the sense in 
which we instinctively use the word in tax matters, we see that 
it means something more than that. It not only implies native 
or acquired power of production, but includes at least also the 
opportunity of putting these powers to use, the manner in which 
the powers are actually employed, and the results of their use 
as measured by periodical or permanent accretion to the pro- 
ducer's possessions. We have seen how the original idea was 
that represented by President Walker, but how this was soon 
supplanted by the more real and practicable tests, first of prop- 
erty (or permanent accretion), then of income (or periodical 
accretion). But, furthermore, faculty connotes an additional 
conception. It means not only powers of production or results 
of powers of production, but also the capacity to make use of 
these powers or these results — the capacity, in other words, 
of enjoying the results of the exertions. It is this latter con- 
ception which has been developed by recent writers, although 
they have carried it to an extreme just as one-sided as that rep- 
resented by the advocates of the earlier theories. The elements 
of faculty, then, are twofold — those connected with acquisition 
or production, and those connected with outlay or consumption. 
What is the application to the matter in hand ? 

If we regard only the first set of elements, it is evident that 
the possession of large fortunes or large incomes in itself affords 
the possessor a decided advantage in augmenting his posses- 
sions. The facility of increasing production often grows in 

1 F. A, Walker, The Bases of Taxation. Political Science Quarterly, TIL 
ri888), p. 14. 



262 SELECTED READINGS IN PUBLIC FINANCE 

more than arithmetical proportion. A rich man may be said 
to be subject in some sense to the law of increasing returns. 
The more he has, the easier it is for him to acquire still more. 
The initial disadvantages have been overcome. This was pointed 
out already by Adam Smith, when he said : " A great stock, 
though with small profits, generally increases faster than a small 
stock with great profits. Money, says the proverb, makes 
money. When you have got a little, it is often easy to get 
more. The great difficulty is to get that little."^ While the 
native power of production remains as before, this " acquired 
power" has greatly augmented. Hence, from this point of 
view, faculty may be said to increase faster than fortune or 
income. And this element of taxable capacity would not illogic- 
ally result in a more than proportional rate of taxation. 

On the other hand, the elements of faculty which are con- 
nected with outlay or consumption, bring us right back again 
to the sacrifice theory. While the idea of faculty includes 
that of sacrifice, the two ideas are not coextensive. Faculty 
is the larger, sacrifice the smaller, conception. Faculty includes 
two sets of considerations, sacrifice only one. Now, while the 
sacrifice theory in itself, as we have seen, is not sufficient to 
make us demand any fixed scale of progression, its influence 
in the other direction is certainly not strong enough to coun- 
tervail the productive elements of faculty, which seem to imply 
progressive taxation. In fact, we may go further and say that 
the sacrifice theory, or consumption element in faculty, can 
certainly not be used as an argument necessarily leading to pro- 
portional taxation. It does not lead necessarily to any definite 
scale of progression ; much less can it lead necessarily to a fixed 
proportional taxation. But if we never can reach an ideal, 
there is no good reason why we should not strive to get as close 
to it as possible. Equality of sacrifice, indeed, we can never 
attain absolutely or exactly, because of the diversity of individual 
wants and desires ; but it is nevertheless most probable that 
in the majority of normal and typical cases, we shall be getting 
closer to the desired equality by some departure from propor- 
tional taxation. In certain individual cases even regressive 
taxation might accomplish the result best, in other individual 

1 Wealth of Nations, Bk. I, ch. 9. 



JUSTICE IN TAXATION 263 

cases proportional taxation would be the most serviceable. But 
if we take a general view, and treat of the average man — and 
the state can deal only with classes, that is, with average men 
— it seems probable that on the whole less injustice will be 
done by adopting some form of progression than by accepting 
the universal rule of proportion. A strictly proportional rate 
will make no allowance for the exemption of the minimum of 
subsistence. It will be a heavier burden on the typical average 
poor man than on the typical average rich man. It will be apt 
to be relatively more severely felt by the average man who has 
only a small surplus above socially necessary expenses, than 
by the average man who has a proportionally larger surplus. 
It will, in short, be apt in normal cases to disproportionately 
curtail the enjoyments of different social classes. 

Hence, if we base our doctrine of the equities of taxation on 
the theory of faculty, both the production and the consumption 
sides of the theory seem to point to progressive taxation as at 
all events neither more illogical nor more unjust than propor- 
tional taxation. It may, indeed, frankly be conceded that the 
theory of faculty cannot point out any definite rate of progres- 
sion as the ideally just rate. In so far there seems to be some 
truth in Mill's contention that progressive taxation cannot give 
that " degree of certainty " on which a legislator should act; as 
well as in McCulloch's assertion that when we abandon propor- 
tion we " are at sea without rudder or compass." It is true that 
proportion is in one sense certain, and progression is uncertain. 
But their argument proves too much. An uncertain rate, if it 
be in the general direction of justice, may nevertheless be pref- 
erable to a rate which, like that of proportion, may be more 
certain without being so equitable. Half a loaf is better than 
no bread. Stability is assuredly a good thing. But it is highly 
questionable whether a stability which is necessarily unjust is 
preferable to an instability that works in the general direction 
of what is recognized as justice. All governmental actions 
which have to do with money relations of classes are necessarily 
more or less arbitrary. The fines imposed by the courts, the 
fixing of the rates of import duties or excise taxes are always, 
to a certain extent, inexact. And in truth, a strict proportional 
tax, if we accept the point of view mentioned above, is really 



264 SELECTED READINGS IN PUBLIC FINANCE 

more arbitrary as over against the individual taxpayers, than 
a moderately progressive tax. The ostensible "certainty" in- 
volves a really greater arbitrariness. 

So, also, the other arguments often advanced against progres- 
sion seem to be in some measure destitute of foundation. ^ The 
common objection that progression is confiscation because it 
must finally end by swallowing up the whole capital may be 
completely obviated, as we have seen, by making the rate of 
progression itself degressive,^ so that it would become impos- 
sible to reach one hundred per cent or any like percentage 
of large fortunes. 

The objection that it is a fine put on industry and saving is 
really not applicable to progressive taxation as such, but rather 
to the whole system of taxation on property or income. The 
logical conclusion from this would be the demand for taxation 
only on expense ; and even that would be to a certain extent a 
tax on industry. But it is hard to see why industry and saving 
should not be taxed, if it increases our capacity to pay taxes ; 
and it is still harder to see how we can avoid taxing industry. 
Furthermore, it is a mistake to assume that larger fortunes are 
always the result of individual saving. The argument, in short, 
is not an argument against progression, but against taxation in 
general. If a moderately progressive tax is really more equi- 
table than a strictly proportional tax, progression will be less of 
a fine on thrift and industry than proportion would be. 

Finally, the argument that progressive taxes are not produc- 
tive of revenue is not of great weight. The contention has 
never been urged that progressive taxes yield less than propor- 
tional taxes, but simply that they do not yield more. Now, as 
it has already been pointed out in a previous chapter, the func- 
tion of progressive taxation is not so much to obtain increased 
revenues as to apportion the burden more equally among the 
taxpayers. If it is conceded that the progressive tax is more 
equitable than the proportional tax, it is utterly immaterial 
whether it yields more revenue or not. 

1 The objections commonly urged are well summed up in Bastable, Public 
Finance, 308-313 (third edition). 

2 A degressive rate is one which increases up to a certain point, and thereafter 
remains constant. — Ed, 



JUSTICE IN TAXATION 265 

It is possible, therefore, to draw only this very vague conclu- 
sion as to the general legitimacy of the principle of progressive 
taxation. The practical application of the principle depends on 
a series of important considerations. 

In the first place we are confronted by the question of inci- 
dence. If the theory of general diffusion of taxation be true, 
then it makes no difference whether we levy a proportional or 
progressive tax. For, since the tax would ultimately be shifted 
to the consumer, the taxpayer would not be injured, while the 
consumer would bear the tax only in proportion to what he con- 
sumed. It is a singular fact that this illogical procedure of the 
advocates of the diffusion theory has always been overlooked. 
For the most heated opponents of progressive taxation have 
been, like Thiers, advocates of the diffusion theory of taxa- 
tion without perceiving the absurdity of their position. The 
diffusion theory of taxation, however, we know to be entirely 
unsound.^ Nevertheless, in so far as taxes really are shifted at all 
from the taxpayer, the problem of progression loses its impor- 
tance. For if taxes are actually shifted, the rate in the first 
instance is of no essential consequence. It is only in so far as 
we assume that so-called direct taxes remain where they are put, 
that the considerations of faculty or ability are of any weight. 
How far this assumption is true has been investigated in 
another place. For the purpose of the theoretical discussion it 
may be taken for granted that the problem of progression ver- 
sus proportion must be treated on the hypothesis that the as- 
sumption is true. But when we come to construct a progressive 
rate in practice, we must be careful to ascertain how far the 
assumption conforms to reality. A progressive- rate of taxation 
which does not reach individual faculty at all is as unnecessary 
as it is illogical. 

Secondly, the defense of progression rests on the theory that 
it is applicable to general taxation, taken as a whole. It rests 
on the assumption that taxes are paid out of revenue, and that 
the whole system is framed with this end in view. But it is 

1 See my monograph on The Shifting and Incidence of Taxation, Publications 
of the American Economic Association, Vol. VII, Nos. 2 and 3. (This work has 
since been brought out in a second edition, revised and enlarged, New York, 1899.) 
— Ed. 



266 SELECTED READINGS IN PUBLIC FINANCE 

obviously an immensely difficult task to shape a whole system 
of taxation so that the average general rate will be a moderately 
progressive one. Actual systems of taxation are of the most 
varied kinds. In some taxes it is impracticable to introduce a 
progressive scale, as they are by their very nature proportional, 
as, e.g.^ tithes or poll taxes, — for a graduated poll tax is really 
not a poll tax at all, but a class tax. In other cases the taxes in 
actual life are even regressive, as, e.g., many of the indirect 
taxes. It would be impossible thoroughly to carry out the 
principle of general progression unless we had a single uni- 
versal income tax. But no scientific writer to-day favors a 
single income tax, or a single property tax, or for that matter a 
single tax of any kind. Thus, in advocating the system of pro- 
gression, we must have regard to the facts of the individual case, 
and to the general sentiment of the community. In the United 
States, for instance, the general property tax in its practical 
operation is largely regressive, especially in so far as personalty 
is concerned. The tax reformers, as we shall see, have quite 
enough to occupy their attention in trying to make the rate 
really proportional, before bothering themselves with the more 
ideal stage of progression. But it is all the more worthy of 
consideration whether other taxes may not properly be levied 
according to the progressive principle. It is more than Hkely 
that a number of moderate progressive taxes would after all 
still simply result in securing an average proportional rate for 
the whole system of taxation. And we have seen that some 
defenders of proportion in theory admit the legitimacy of cer- 
tain progressive taxes as a compensation for other really re- 
gressive taxes. In practice, then, we may frequently demand 
progressive taxes without being at all so extreme or so " com- 
munistic " as many persons believe. 

Thirdly, the defense of progressive taxation rests on the 
assumption of faculty as the basis of taxation. Now while this 
is true of taxation as a whole, for general state purposes, it is 
questionable whether the principle of benefits is not of some 
weight in problems of purely local and municipal finance. A 
discussion of the contest between these two principles and the 
limits of their relative applicability to different phases of public 
revenues would take us too far astray here. But it may be 



JUSTICE IN TAXATION 267 

said that it is coming more and more to be recognized that 
within the domain of the taxing power the principle of benefits 
should be followed to some extent in strictly local finance.^ If 
this is true, the principle of progression will be of rather more 
limited application to some of the charges employed for the 
support of local government ; for the theory of benefits, as we 
have seen, leads logically to proportion, not to progression. 
Thus the practical sphere of the applicability of the progressive 
principle would be even more circumscribed. 

Finally, it must not be overlooked that high rates of progres- 
sion may engender or augment attempts at fraud and evasion. 
That this is possible cannot be denied. But, as has already 
been pointed out, the danger is apt to be greatly exaggerated. 
We know that there is certainly more fraud in the countries 
of proportional taxes like America than in the home of progress- 
ive taxes like Switzerland or Germany. Still it may be con- 
ceded that with progressive rates there would probably be even 
more fraud than actually exists, even though the fears of the 
doubters in Australia and Switzerland have not been realized. 
Much depends on the manner in which progression is applied, 
and the particular tax to which it is extended. Still more de- 
pends on the rate of the progression. The higher the progres- 
sion, the more likely that the results will be perceptibly bad. 
But the objection is really one against the abuse, not the use, 
of the progressive principle. 

If, therefore, we sum up the whole discussion, we see that 
while progressive taxation is to a certain extent defensible as an 
ideal, and as the expression of the theoretical demand for the 
shaping of taxes to the test of individual faculty, it is a matter 
of considerable difficulty to decide how far or in what manner 
the principle ought to be actually carried out in practice. 

Theory itself cannot determine any definite scale of progres- 
sion whatever. And while it is highly probable that the ends 
of justice would be more nearly subserved by some approxima- 
tion to a progressive scale, considerations of expediency as well 
as the uncertainty of the interrelations between various parts of 

1 For a discussion of these points, see my article on The Qassification of Public 
Revenues, Quarterly Journal of Economics, Vol. VII, pp. 311 <?/ seq, (See also the 
author's Essays in Taxation, 265-304 (second edition, New York, 1900). — Ed, 



268 SELECTED READINGS IN PUBLIC FINANCE 

the entire tax system should tend to render us cautious in advo- 
cating any general application of the principle. It remains to 
investigate as to how far the principle is applicable to the con- 
ditions surrounding us in America to-day.^ But, in last resort, 
the crucial point is the state of the social consciousness and the 
development of the feeling of civic obligation. 

1 In the following chapter of his monograph, Professor Seligman considers the 
practicability of progressive taxation, especially in the United States, and comes to 
the following conclusion : 

" We see then that while progression of some sort is demanded from the stand- 
point of ideal justice, the practical difficulties in the way of its general application 
are well-nigh insuperable. Progression is defensible only on the theory that the 
taxes are so arranged as to strike every individual on his real income. But in 
default of a single tax on incomes, which is visionary, practicable tax systems can 
reach individual incomes only in a very rough and roundabout way. Under such 
practical conditions it is doubtful whether greater individual justice will be attained 
by a system of progression than by the simple rule of proportion; and it is question- 
able whether the ideal advantages of progression would not be outweighed by its 
practical shortcomings. For the United States at all events, the only important tax 
to which the progressive scale is at all applicable at present is the inheritance tax. 
For the future development of the idea we must rely on an improvement in the 
tax administration, on a more harmonious method of correlating the public revenues, 
and on a decided growth in the alacrity of individuals to contribute their due share 
to the common burdens." — Ed. 



CHAPTER X 

CAPITATION TAXES 

40. The Poll Tax in American Commonwealths. — Although 
the poll tax has been abandoned in most of the countries of 
Europe/ it is still found in about half of the American states.^ 
Sometimes it is a distinct state tax ; sometimes it is associated 
with the general property tax ; sometimes it is merely a local 
tax, and used for such local purposes as the care of highways. 
It is found in most of the New England and the Southern states, 
but less frequently in the Central or Western states. In many 
cases the tax is poorly collected, as may be illustrated by the 
experience of Wisconsin. In that state the poll tax is a local 
tax which in towns and villages is " to be collected for highway 
purposes only." In 1898 the Wisconsin Tax Commission re- 
ported that the law " has become practically a dead letter in 
many portions of the state"; that **more than half the towns 
and villages in the state and about two thirds of the cities did 
not collect any poll tax in 1897"; ^^^ that in eight counties 
"not a dollar of poll tax was collected." The net result was 
stated as follows : 

Of the 1 137 towns and villages in the state only 493 made 
any attempt to collect any poll taxes, and the total amount 
which they collected was ^95,871.75. Of the iii cities only 
39 report any poll tax raised, and the total amount obtained was 
the comparatively small sum of $12,578.37.^ 

1 Capitation taxes are employed in France and some of the Swiss cantons. The 
French personal tax {impot personnel) will be described in the next chapter. 

2 The experience 'of the American states is described by Seligman in his mono- 
graph on Finance Statistics of American Commonwealths, in Publications of Ameri* 
can Statistical Association, 1889. 

3 Report of the Wisconsin State Tax Commission, 1898, pp. 68 and 107, 

269 



2yo SELECTED READINGS IN PUBLIC FINANCE 

41. The Poll Tax in Massachusetts. — The Commission of 
1897 gave the following account of the working of the poll tax 
in Massachusetts : ^ 

The Commonwealth of Massachusetts levies a poll or capita- 
tion tax on every male inhabitant of the Commonwealth above 
the. age of twenty years, whether a citizen of the United States 
or an alien, and upon every female citizen of said age request- 
ing to be assessed therefor. The poll tax of the old, poor, and 
infirm may be abated at the discretion of the assessors. 

The assessors are required to canvass their respective cities 
and towns, and after diligent inquiry to make true lists of 
every male person above the age of twenty years residing in 
their city or town, and of all women of the like age who request 
to be assessed. In cities and towns of more than five thousand 
inhabitants the assessors are required to prepare and to have 
printed street lists arranged by voting precincts, designating all 
buildings used for residences, and giving the age, name, and 
occupation of every person assessed for a poll tax. These lists 
are sent to the registrars of voters, though it is not necessary 
for registration that the voter's name be entered upon this list. 
The registrars, on their part, are required to make a return to 
the assessors of the names of all persons who have registered 
with them and whose names are not upon the assessors' lists. 
The assessors, having obtained a list of all those liable for a 
poll tax, proceed to assess upon them the state and county taxes. 
The state tax is assessed upon the number of polls in each 
place until such assessment amounts to $\ upon each poll, the 
remainder of the tax being then assessed upon property. In 
like manner the county taxes are assessed upon the polls up 
to the sum of ^i on each poll, the remainder there also being 
assessed on property. The effect is that the rate of the poll 
tax is in almost all cities and towns $2 per year. In six 
localities only is there a less rate. In the city of Chelsea 
and in the towns of Winthrop and Revere the poll tax is 
only $\. This arises from the fact that the city of Boston 
assumes the entire county tax for the county of Suffolk ; hence 
in these places the poll tax is limited to the state tax of ;^i. 

1 Report of the Commission on Taxation, pp. 3-5. 



CAPITATION TAXES 271 

In three towns the amount of the total poll tax levied in the 
manner described above is less than ^2, namely: Savoy, ^1.80; 
Gay Head, $1.50; and Prescott, $i.()7. 

In former years payment of the tax was a condition of the 
exercise of the franchise. For that reason it was for the 
most part paid, — if not directly by the person upon whom 
it was assessed, then paid on his behalf by the political organi- 
zation to which he belonged. By an amendment of the Con- 
stitution in 1 891 the provision making the payment of the tax 
a prerequisite to voting was repealed. Since that time it has 
been difficult to collect the tax from those not subject to the tax 
for property. The amount in each case being small, the tax is 
now in the cities very largely uncollectible, except from persons 
who are also taxed for property. 

Although the poll tax is thus, strictly speaking, a state and 
county tax, it is not to be inferred that the financial resources of 
the state or of the counties are affected by the difficulty of col- 
lecting it. The cities and towns pay over their respective shares 
of the state and county taxes, without regard to the success of 
their collection of the poll tax. They are accountable for con- 
tributing their apportioned quotas to state and counties, first by 
the poll tax and then by taxes on property. What they do not 
succeed in raising by the former tax they must make up by the 
latter. 

The number of male persons assessed for poll tax in 1896 was 
723,736; the number of persons assessed for poll tax only was 
5 1 1,659 5 the amount of the tax assessed on polls was ^1,434,629.^ 

42. The Poll Tax in North Carolina. — The poll tax has played 
a more important part in the history of North Carolina than in 
probably any other state in the American Union. Until the 
time of the Revolution North Carolina never employed any 
direct tax except that upon polls, in the assessment of which 
adult white males and adult colored males and females were 
included. Indirect taxation, moreover, was not very important, 
being confined for the most part to light duties on imported 

1 For 1904 the assessment upon polls was $1,676,726. — Ed. 



272 SELECTED READINGS IN PUBLIC FINANCE 

spirits ; so that the poll tax was almost the sole reliance of the 
finances of the colony.^ During the Revolution the newly 
organized state began to tax a few kinds of property, chiefly 
land and buildings ; but the poll tax continued, until the middle 
of the nineteenth century, to furnish about half of the state 
revenue.^ Professor G. E. Barnett gives the following account 
of the working of the poll tax in North Carolina : ^ 

In origin the poll tax is coincident with the beginnings of 
taxation in North Carolina. Until near the middle of the 
century, it furnished more revenue than the general property 
tax. This was in large measure due to the fact that the taxes 
on slaves could be collected by sale of the slaves. The great 
importance of the tax is clearly shown by the fact that all of the 
constitutional amendments of 1835 concerned the poll tax. 
These amendments provided that the capitation tax should be 
equal throughout the state, and that all free males over twenty- 
one and under forty-five years of age, and all slaves over 
twelve and under fifty years of age, should be subject to a capi- 
tation tax, and that no other person should be subject to such 
a tax. The capitation tax on slaves was in lieu of any other tax 
on such property. 

In 1852 a part of the revenue derived from the poll tax was 
applied to the support of a state asylum for lunatics and idiots. 
In the constitution adopted in 1868, the poll tax was devoted to 
the support of the pubHc schools and of the poor. 

The state treasury no longer derives any revenue from this 
source, but the proceeds of the tax form a part of the school 
and poor fund of the county in which it is collected. Since, 

1 See Bullock, Essays in the Monetary History of the United States, 178, 192. 

2 Maryland and Virginia, during the colonial period, employed poll taxes very ex- 
tensively ; but had lucrative sources of revenue in import duties and export duties 
on tobacco. In these states property taxes were introduced during the eighteenth 
century, — in Virginia during the French and Indian War, and in Maryland during 
the Revolution, — and the poll tax thereafter was relegated to the background. In 
Maryland, in fact, poll taxes were discontinued entirely. 

3 Studies in State Taxation, edited by J. H. Hollander, Johns Hopkins Studies in 
Historical and PoUtical Science, Series XVIII. Reprinted by consent of editor, 
author, and publisher. 



CAPITATION TAXES 271 

however, the rate is prescribed by the General Assembly, it may 
properly be considered a commonwealth tax. 

Rate. — The provision of the constitution authorizing the poll 
tax is mandatory. It declares, " The General Assembly shall 
levy a capitation tax on every male inhabitant in the state over 
twenty-one and under fifty years of age, which shall be equal to 
the tax on property valued at ;^300." The Supreme Court has 
recently held that if a revenue act does not preserve this propor- 
tion, the tax on both property and poll is void. 

The present state poll tax is $\.2<^. The counties also have 
the privilege of levying a poll tax, but the state and county tax 
together must not exceed $2.00. Not more than one fifth of the 
revenue thus raised can be appropriated to the support of the 
poor. By the Constitution of 1868, the county commissioners 
are empowered to exempt from this tax any persons who are too 
poor or infirm to pay it. 

Collection. — Much difficulty is experienced in the collection of 
the tax. The law provides that, ''if any poll tax or other taxes 
shall not be paid within sixty days after the same shall be 
demandable it shall be the duty of the sheriff, if he can find no 
property of the person liable, sufficient to satisfy the same, to 
attach any debt or other property incapable of manual delivery 
due or belonging to the person liable or that may become due to 
him before the expiration of the calendar year." By means of 
such attachments in the hands of employers and others, many 
poll taxes which would not otherwise be collectible are paid. 
But even with the aid of this device the tax is poorly collected. 
The auditor in his report for 1896 estimates that only two thirds 
of the whites and one half of the negroes above the age of twenty- 
one pay poll taxes. So difficult is the collection of this tax that 
in 1897 the General Assembly enacted that persons or corpora- 
tions failing to pay any tax laid on them by law shall be guilty 
of a misdemeanor and punished by a fine not exceeding ^500 or 
imprisoned not exceeding six months. This law was aimed, of 
course, at the man without property, the citizen who is liable 
only to the poll tax. Taxes due by any citizen with property 
are collectible without fines or imprisonment. It is quite pos- 
sible that this act did not fall within the constitutional provision 
prohibiting imprisonment for debts, but the law does not seem 



2/4 SELECTED READINGS IN PUBLIC FINANCE 

to have been practicable and was repealed by the General 
Assembly of 1899. 

The amount raised by the poll tax is next in amount to that 
raised by the general property tax. In 1898 the return from 
state and county poll taxes amounted to $365,738.27, or nearly 
one half of the sum raised for public schools, exclusive of sums 
raised in the larger towns for graded schools. Besides the poll 
tax levied by state and county, incorporated towns also impose 
poll taxes in North Carolina. In some cases, in fact, in most of 
the larger towns, the municipal poll tax is far in excess of the 
combined state and county poll tax.^ 

Criticism. — The poll tax of North Carolina is clearly a regress- 
ive tax of a very heavy kind. It amounts frequently to doub- 
ling the rate on small property owners. Let us suppose, for 
instance, two property owners, one owning property worth 
$10,000 and another owning property worth $300. If we levy 
on each a property tax of if per cent (an average municipal 
tax in North Carolina) and a poll tax of $5, this amounts to tax- 
ing the richer man at a rate slightly above if per cent, while 
the poorer man has to pay a $10 tax, or at the rate of 3^^ per 
cent. If a poor man has no property and thus escapes the pay- 
ment of the poll tax the very existence of this tax is an induce- 
ment to him never to acquire any property, since from his first 
savings, the state, county, and city take away as much as the 
savings bank would pay him, if he had $300. If he only saves 
$100, they take far more than such a bank wouM pay him. 
That this is a real and an important consideration is revealed by 
statistics from Wake County given by the auditor in his report 
for 1896. Over 60 per cent of the taxpayers of this county 
pay on less than $500 of real and personal property, and the 
auditor estimates that 80 per cent of the taxpayers of the entire 
state pay on less than $500 worth of property. 

On such persons the poll tax weighs heavily. The richer 
man does not feel it, the man with no property largely escapes 
it, but upon the small property owner it hangs like an incubus. 

1 The rates in some of the largest cities in North Carolina are as follows : Raleigh, 
^3.70; Winston, ^4.05 ; Charlotte, $3 ; Wilmington, ^3.96. These are the munici- 
pal poll taxes; to them must be added the state and county taxes, nearly always 
equal to %2. 



CAPITATION TAXES 275 

It is not a tax proportioned to ability. It is not even, according 
to the theory of the general property tax, proportioned to wealth. 
In what manner its advocates would justify the retention of the 
tax is not clear. To most people who favor poll taxes, the old 
idea of paying the state for a service rendered, probably con- 
stitutes the best argument in its behalf. 

As has been said above, the poll tax is mandatory and no 
General Assembly can refuse to levy it. There is urgent need 
of a change in the constitution permitting the tax to be laid 
only on persons not paying an equal sum on property. While 
such a tax would be theoretically far from a just tax, it would 
yet be an improvement on the present system and would lift 
the dead weight which hangs so heavily on the small property 
owner. 

43. The Poll Tax in Mississippi and Georgia. — In other 
Southern states poll taxes have retained considerable financial 
importance. Dr. C. H. Brough writes as follows concerning 
poll taxes in Mississippi : ^ 

Although Mississippi is aristocratic in its economic substra- 
tum, its attitude in regard to the poll tax has always been demo- 
cratic. The landowners never objected to bearing the burdens 
of this tax, and they used it as an instrument to encourage slav- 
ery. This was accomplished, as we have seen, by a discrimina- 
tion in the rate charged "free males of color" and white males. 
After the abolition of slavery and the enfranchisement of the 
freedmen, this discrimination was abolished and a uniform rate 
levied without regard to color or previous condition of servitude. 
The poll which, during the reconstruction period, was as high 
as $6 per capita, is now fixed at -^2, and is imposed on all males 
between the ages of twenty and sixty years. 

The importance of the poll tax in Mississippi may be appre- 
ciated from the fact that it is the principal fiscal device of the 
school districts in the state during the four months* public school 
term. Furthermore, the payment of the poll tax is made an 
implied condition of suffrage by that provision in the state con- 
stitution requiring two years' residence and the payment of all 

1 Studies in State Taxation. 



276 SELECTED READINGS IN PUBLIC FINANCE 

taxes during that time, as two of the necessary quaUfications of 
an elector. 

No concealment need be made of the fact that the poll tax is 
used in Mississippi as a means of disqualifying the negro in 
national elections and controlling his vote in local elections. 
That the poll tax is more important in the state as an adjunct 
of suffrage than as a source of revenue is revealed by the fact 
that in 1897 out of a capitation of $529,694, only $250,057 was 
collected. Property owners are willing to pay a penalty for 
their ownership of property, in order to maintain white rule to 
protect their property. However barbarous the poll tax may 
be as a fiscal anachronism, social conditions in Mississippi are 
not yet ripe for economic reform in this direction. 

And of the poll tax in Georgia, Dr. L. F. Schmeckebier 
writes : ^ 

Capitation taxes yield the second largest amount derived from 
taxation. Every male inhabitant of the state, between the ages 
of twenty-one and sixty years, is subject to a poll tax of $1 per 
annum. Blind persons, cripples, and maimed and disabled con- 
federate soldiers are exempt from this tax. No city or county, 
or any other corporate authority, is allowed to assess or collect 
any capitation tax whatever, except a street tax, and that after 
an opportunity is given to work upon the streets. The payment 
of the poll tax is requisite for the exercise of the suffrage, and 
this is a source of political demoralization. The negro espe- 
cially refrains from paying his poll tax, and waits for the politician 
to pay it for him, which is ordinarily done. There is no way 
of enforcing the collection of the tax from persons who do not 
own property, except as a qualification for voting, and thus the 
tax always tends to fall on those who already own property. 
Furthermore the constitution of the state requires that a voter 
shall have paid all taxes required of him since 1877. Thus pay- 
ment for the current year is not sufficient to qualify, but the 
voter must pay all taxes in arrears. There is a large class of 
citizens who sometimes pay and sometimes do not, and when 
they do pay, they do so merely for the purpose of voting. But 

1 Studies in State Taxation. 



CAPITATION TAXES 277 

before they can do this they must register and swear that they 
have paid all taxes since 1877, and hence the tax is a constant 
incentive to perjury. The pernicious effect of such a system 
hardly needs any comment. About 60 per cent of the tax is 
generally collected. The census of 1890 showed a voting popu- 
lation of 398,122 and the yield of the tax in 1898 was 
;^234,43i.99. The proceeds are used **for educational purposes 
in instructing children in the elementary branches of an English 
education only." 



CHAPTER XI 

THE GENERAL PROPERTY TAX 

44. The Conclusions of the New York Tax Commission of 1871 
and 1872. — The chief financial resource of American states has 
for a long time been a general tax upon all property^ within the 
reach of th-e taxing power. This general property tax, as it is 
called, has never worked satisfactorily, and its shortcomings 
have led to the appointment of numerous tax commissions^ to 
investigate the problem of state and local taxation. The reports 
of some of the more important of these commissions are valu- 
able sources of information concerning the workings of the 
general property tax. Our first selection is from the Second 
Report of the Commissioners appointed to revise the Laws for 
the Assessment and Collection of Taxes in New York ^ (i^/i 
and 1872): 

The property of New York, made subject to taxation, divides 
itself into two classes, real and personal. 

Real Property, embracing, according to the usual acceptance 
of the term, lands and buildings, being visible and tangible, pre- 
sents no inherent difficulty in the way of ascertainment, valua- 
tion, and assessment. The New York system of taxation in 
respect to these objects might, therefore, be reasonably sup- 
posed to work with some degree of uniformity and equality ; 
but so far from this being the case, it would be difficult, nay, 
probably impossible, to find any two contiguous towns, cities, 

1 Certain exemptions are granted, however, to property used for religious, benevo- 
lent, or charitable purposes. 

2 The work of such commissions is described by J. W. Chapman, State Tax Com- 
missions (Baltimore, 1897). 

8 The Commissioners were David A. Wells, Edwin Dodge, and George W. Cuyler. 

278 



THE GENERAL PROPERTY TAX 279 

or counties in the state, in which the valuation of such property 
approximates in any degree to uniformity. So far as the com- 
missioners can ascertain, the average aggregate valuation varies 
from 20 per cent of actual value as a mininum, to 50 per cent as 
a maximum ; with a probable total average for the whole state 
of a rate not in excess of 40 per cent. The lowest valuations, 
furthermore, do not, as might be supposed, occur in the poorest 
and most sparsely settled counties of the state, but rather in the 
richest and most densely populated ; and it is also curious to 
note, that comparing the real estate valuations of the several 
counties of the state in the years i860 and 1870, with the census 
returns of their population at the same periods, it will be found 
that some counties which have increased their population and 
railroad facilities, have decreased their valuations, while other 
counties, which have actually diminished in population, have 
increased their valuations. 

The increase in the assessed valuation of the real property of 
the entire state for the ten years, from 1861 to 1870 inclusive, 
was 47^ per cent ; but deducting the valuations of New York 
and Kings counties, the increase was only 8| per cent, although 
the increase in the population of these two sections, during the 
same period, was not very unequal; the increase in New York and 
Kings counties having been 269,722, and for the remainder of the 
state, 232,301. Now as the law of the state is clear and explicit, 
that the valuations shall be uniform, it is evident that the law in 
this respect has become a dead letter and wholly inoperative.^ 

^ In their First Report, submitted in 1871, the Commissioners give the following 
account of the methods of assessing real estate : 

" In New York the state tax is apportioned among the counties on the basis of 
their respective valuations of real estate, and the same rule prevails among the towns 
of the different counties. Hence prises the double competition between the assessors 
nf counties in the aggregate, and of the towns in each county, for the lowest possible 
valuation. Having completed his official labors, each assessor in the state subscribes 
an oath, of which the following is the material portion : 

" ' We do severally depose and swear that we have set down in the foregoing assess- 
ment-roll all the real estate in , according to our best information, . . . and that 

we have have estimated the value of said real estate at the sums which a majority of 
the assessors have decided to be the full and true value thereof and at which they 
would appraise the same in pay?nent of a just debt due from a solvent debtor^ 

" And the law further provides ' that every assessor who shall willfully swear false in 
taking and subscribing said oath, shall be guilty of and liable to the penalties of will- 



28o SELECTED READINGS IN PUBLIC FINANCE 

But if such be the inequality and illegaUty of the methods of 
taxing real property at present followed in the state of New 
York, the results which have attended the attempts to \.2iyi per- 
sonal property under the same system are infinitely more farcical 
and disgraceful. The evidence of this failure is most conclusive, 
and the reasons why, under the existing system, nothing but 
failure in respect to the taxing of this description of property 
can be anticipated, are of a character that admit of being readily 
understood and verified. Thus the total equalized valuation of 
all the property of the state of New York for the year 1871- 
72 is $2,076,454,000, of which but little more than one fifth (21.48 
per cent), or 1^445,918,000, was returned under the head of 
personal property. 

In their previous report the commissioners presented evidence 
tending to show that the aggregate value of the real property 
of the state and the aggregate value of its personal property 
closely approximated. They furthermore presented a schedule 
of property of the class personal within the state, founded on 
exact data, or careful estimate, whose aggregate amount nearly 
equaled in value the entire amount of all the property of the 
state, real and personal, returned for taxation during the year 
1870-71. They would also recall the opinion authoritatively 
expressed in the constitutional convention of 1868, that 30 citi- 
zens of the state could be named whose aggregate wealth 
(mainly personal) was very considerably in excess of the valua- 
tion for that year of all the personal property of the entire state. 
But without again entering into details, the commissioners would 
now say, that another year's experience has led them to this 
general conclusion, that the authorities of the state, under a law 



ful and corrupt perjury.' Let us now see what are the acknowledged facts in respect 
to the valuation of real property in New York, and some of the other states, where a 
substantially like oath is made imperative. 

" In some instances in New York the valuation of real estate for taxation is reported 
as low as 20 per cent of its real value. In a majority of cases in the country the rate 
varies from 25 to 35 per cent, and rises in the cities to 50 and possibly 60 per cent as 
a maximum. In short, there cannot probably be found a single instance in the whole 
state, unless possibly in the case of certain unoccupied lands, the property of non- 
residents, where the law as respects the valuation of real property is fully complied 
with, and where the oaths of the assessors are not wholly inconsistent with the exact 
truth." 



THE GENERAL PROPERTY TAX 281 

(professedly executed) requiring the assessment of all personal 
property at its full value, do not in fact succeed in assessing a 
proportion equal to 30 per cent of the recognized low valuation 
of the real estate ; or more than 1 5 per cent of the real and true 
value of all such property immediately located within the state, 
and as such subject to the state authority. So much in proof 
of the evidence of the failure of the existing laws relative to 
local taxation to do what they were designed and purport to do. 
So much also in evidence that the existing system of local taxa- 
tion, by its own gravitation and surrounding influences, has, 
with the exception of incorporated capital, practically come 
down to a tax upon real estate. 

The reasons why nothing but failure in respect to the valua- 
tion and assessment of personal property under the existing 
system can be anticipated are iji the main as follows : 

In the first place, much of the property termed " personal," 
and which under the system operative in New York and most 
of the other states it is made obligatory on the assessors to 
value and assess, is incorporeal and invisible, easy of transfer and 
concealment, not admitting of valuation by comparison with any 
common standard, and the situs or locality of which, for purposes 
of assessment and taxation, involves some of the oldest, most 
controverted, and yet unsettled questions of law. Of such a 
character are all negotiable instruments, i.e.y national, state, 
municipal, and corporate bonds ; written obligations of indebted^ 
ness on the part of individuals; book accounts, annuities, 
money at interest, cash on hand, and the like, the whole con- 
stituting by far the largest proportion of the so-called personal 
property of the country. 

It is obvious, therefore, that the law contemplates the doing 
of an act ; namely, the valuing and assessing of that which is 
invisible and incorporeal, which cannot be done without the full- 
est cooperation, through communication of information, of the 
taxpayer himself ; and yet for the imparting of which the two 
most powerful influences that can control human action, namely, 
love of gain, and the desire to avoid publicity in respect to one's 
private affairs, cooperate to oppose. 

And in the case also of much of the so-called " personal 
property " that is visible and tangible, as furniture, books, works 



282 SELECTED READINGS IN PUBLIC FINANCE 

of art, jewelry, musical instruments, and the like, it is clear that 
its valuation, with any approximation to fairness, must be not 
only the work of time, but must require an amount of experience 
rarely in the possession of any one individual. 

Whenever, therefore, a system contemplating the taxation of 
personal property, generally, has been projected, its authors 
have been led, as it were by instinct, to the conclusion that its 
execution with any degree of effectiveness must depend upon 
the employment of extraordinary and arbitrary measures. 
Thus, the old Romans, who first established the taxation of 
personal property at the period of the decadence of the empire, 
and who were not troubled with any restrictions of a constitutional 
character, or any very nice notions about personal liberty or 
general morality, clearly perceived this, and accordingly invested 
their tax oificials with the power of administering torture as a 
means of compelling information and enforcing payment. 

The board of officials of Illinois, who last year, under authority, 
prepared a new tax code for their state, and based their work 
on the hypothesis that the only way to make a better system 
was to enlarge and make more effective the old, also per- 
ceived this ; and accordingly prepared a code, which one of the 
highest authorities in that state characterized in the following 
language : 

" Without exception it is the most objectionable law that was ever pro- 
posed, and we can imagine no act which will become so justly odious and 
detestable. It provides for the establishment of a distinct branch of the 
government, which may be properly styled the grand inquisitorial and confis- 
catory office, clothed with powers and functions, which, if enforced, would 
have produced a revolution in Austria or Turkey." — • Chicago Tribune. 

The officials of the state of Massachusetts, also, in attempting 
to carry out a system which provides for the valuation of that 
which is intangible, and the assessment of what is invisible, 
acknowledge the necessity of the employment of extraordinary 
measures, and accordingly resort to a method of procedure 
which has no parallel except in the records of the Middle 
Ages and of the Inquisition, and constitutes, in itself, a satire 
upon any claim to the enjoyment of a wholly free and enlightened 
government. For, faiHng to obtain satisfactory information 
about the private affairs of any individual, the chief assessors 



THE GENERAL PROPERTY TAX 283 

and their subordinates, to the number of some fifty, meet in 
secret session, in a large upper chamber set aside for the pur- 
pose, and appropriately termed the "dooming chamber," when 
the citizen in question, without being present either by counsel 
or in person, is arbitrarily doomed to the payment of any sum 
which a majority of those present may think proper; and from 
w^hich "dooming" there can be no appeal. 

Now the old pagans, the officials of Illinois, and the Boston 
assessors have undoubtedly been consistent in following the 
only line of action calculated to render their ideas of raising 
revenue by taxing all descriptions of property in any degree 
effective ; and the people of the state of New York ought clearly 
to understand that the same course is the only one open to them 
which can, by any possibility, make their existing system any- 
thing different from the farce which every intelligent person must 
acknowledge that it now is. 

45. The General Property Tax in the United States:^ by 
Charles J. Bullock. — The status of the general property tax 
nearly forty years after the preceding account was written is 
considered in the following extract : 

The census tells us that in 1902 the people of the United States 
paid taxes amounting approximately to $1,378,700,000. This was 
a per capita charge of $1745, and was probably not less than 
one-twelfth of the current product of the industries of the coun- 
try. Thirty-eight per cent of the total was claimed by the federal 
government, which collected $518,100,000, in the form of customs 
and excise duties. The remainder, amounting to $860,600,000, 
represented the taxes levied for state, county, and municipal 
purposes. 

In ordinary times the federal revenues receive little attention, 
since they come from indirect taxes, which, for the most part, 
are paid "insensibly" in enhanced prices for commodities of 
common consumption. Without doubt they do not merit this 
neglect, since they offer many problems of great interest and 
importance. Yet neglected they are ; and neglected they prob- 
ably will be so long as they retain their present form. We com- 
plain bitterly if local taxes on property increase $1 upon each 

1 Originally published in the Boston Transcript, Jan. 13, 20, and 27, 1909. 



284 SELECTED READINGS IN PUBLIC FINANCE 

thousand of the assessors' valuation ; but the federal revenues 
may rise from $544,274,000 to $594,454,000, as they did between 
1905 and 1906, without the average man knowing or caring about 
the addition of $50,000,000 to the nation's tax bill. 

But with state and local taxation the situation is very different. 
In 1902 approximately $137,300,000 was derived from corpo- 
ration, inheritance, and license taxes, which come from a com- 
paratively small number of contributors and are not directly felt 
by the general body of taxpayers ; while $16,600,000 was re- 
ceived from poll taxes levied generally at fixed rates which do 
not change with variations in public expenditure. But such 
revenues supplied less than 18 per cent of the sum which the 
state and local governments needed to raise by taxation ; and 
the balancg, amounting to $706,700,000, was secured by a direct 
levy upon the property of the people. This was equivalent to 
a per capita charge of nearly $9 and constituted 51.3 per cent of 
all the taxes collected for national, state, and local purposes. 
The amount which each taxpayer contributed was plainly stated 
in his annual tax bill and could be in no way ignored. Every 
increase of local outlays — and most increase in state; expendi- 
tures — tends to increase the direct taxes upon property, which 
are levied at rates that vary according to public needs. It is 
not strange, therefore, that to an American the word "taxation" 
is usually synonymous with a tax on property ; and that reform in 
taxation means some sort of a change in the general property tax. 

In New England the property tax dates to early colonial times ; 
in New York it was introduced after the colony passed under 
British control; in New Jersey, Pennsylvania, and South Caro- 
lina, taxes upon various classes of property were in operation 
before the close of the seventeenth century. In Maryland, Vir- 
ginia, and North Carolina opposition of the large landholders to 
a tax on land led to the extensive use of poll taxes or of export 
and import duties ; but the exigencies of the Revolutionary period 
compelled these states to establish permanent taxes on property. 

The federal Constitution prohibited any state from taxing ex- 
ports and imports, so that after 1789 it was necessary for the 
various commonwealths to abandon customs duties. Thus the 
property tax came more and more to the forefront ; and, as new 
states were formed, it spread rapidly westward From 1790 to 
i860 it was virtually the sole reliance of many commonwealths, 



THE GENERAL PROPERTY TAX 285 

and was everywhere the mainstay of county and municipal 
revenues. By i860 it was universally accepted as the American 
form of taxation, and was firmly embedded in most of the state 
constitutions. 

And yet it was a fiscal device once common in Europe, with 
which the early colonists had been familiar in the country from 
which they came. In England, where it was known as the sub- 
sidy, it had developed all the faults which followed its introduc- 
tion into the New World. In 1592 one writer stated that not 
more than five men in London were assessed upon goods in excess 
of £200, and in 1601 Walter Raleigh complained that "the poor 
man pays as much as the rich." With changes in form and name 
the tax continued to the end of the eighteenth century. Adam 
Smith tells us that in his time, while land was probably assessed 
at one-half its actual value, personal estates were not assessed at 
more than a fiftieth part of theirs ; and that in some towns the 
whole tax was assessed upon real property, "as in Westminster, 
where stock and trade are free." So complete was the escape of 
personal property that the tax had come to be known as the 
"land tax," and in 1798 it was made a fixed charge upon the 
land. This marked the disappearance of the property tax from 
the British statute book. .----"l 

In most other countries of Europe the outcome was the same. 
The general property tax was tried and found wanting ; and 
to-day it is employed as a main source of revenue only in some 
of the Swiss cantons, where, however, it is usually supplemented 
by income taxes. In Holland property is still taxed, but at a 
moderate rate, and conjointly with a tax upon income. In Prus- 
sia and some other German states a very light property tax is 
imposed, as a supplement to a general tax on income ; but the 
rate is exceedingly low — in Prussia only one-twentieth of i per 
cent — so that it is neither an appreciable burden on taxpayers 
nor an important source of revenue to the government. Far from 
being an American invention, therefore, the general property tax 
is a discarded European device which has been fastened upon us 
rather by historical accident than by reason of its peculiarly 
American and democratic qualities. Modern tax systems are 
based upon the principle that it is necessary to discriminate 
between the various classes of property or business, and to em- 
ploy different methods and rates of taxation in dealing with 



286 SELECTED READINGS IN PUBLIC FINANCE 

them. Our American states and some of the Swiss cantons 
stand substantially alone in their effort to tax all kinds of prop- 
erty at a uniform rate. 

In the conditions that existed in this country in the seventeenth 
and eighteenth centuries the faults of the property tax were far 
less glaring than they are to-day. Land, houses, cattle, and small 
stocks of merchandise constituted the wealth of the people, and 
these things were tangible and could be found and valued with 
some certainty and fairness. Moneyed capital and various forms 
of intangible property existed, of course, and sometimes managed 
to elude the vigilance of the assessors — as the preambles of not 
a few colonial statutes testify. But such forms of wealth were 
far less important than they became in the nineteenth century, 
and the evils arising from the. attempt to tax them at the same 
rate as other property were not so serious. Alexander Hamilton, 
indeed, remarked that "personal property is too precarious and 
invisible a fund" for the national government to reach "in any 
other way than by the imperceptible agency of taxes on con- 
sumption" ; but the tax laws of the various states showed a 
general purpose to apply the property tax to all forms of per- 
sonalty, intangible as well as tangible.^ With the growth of 
banks and the formation of turnpike, bridge, and canal companies 
after 1789 the shares of corporations were added to the forms 
of property subject to taxation, and the first efforts were made to 
reach corporate securities. 

The nineteenth century brought a rapid multiplication of cor- 
porations and a marked growth of moneyed capital, so that the 
amount of intangible property greatly increased. Not a few states 
established special taxes on banks and insurance companies or 
devised new methods of assessing the property of corporations. 
But the general property tax remained unchanged in general 
outline. In i860 it probably yielded 90 per cent of the state and 
local revenue, and, as already remarked, was accepted everywhere 
as the American form of taxation. 

This is not to say that no dissatisfaction existed. Experiments 
were made with various methods of valuing property, complaints 
were heard that money and stocks and bonds escaped taxation, 
and country districts protested that they were overtaxed. In 

1 There were exceptions, however. Some states confined taxation largely to 
visible objects. 



THE GENERAL PROPERTY TAX 28; 

1843 Connecticut appointed the first tax commission of which 
we have knowledge to investigate her tax laws and ascertain 
what changes were needed to make them more just in their prac- 
tical operation. Other evidences of discontent are not wanting, 
but there was little disposition, if any, to question the beneficence 
and practicability of the general property tax. The common 
solution for all difficulties was to make the tax more effective by 
securing a more complete return of all property subject to tax- 
ation. The trend of pubHc opinion in the United States in 185 1 
is well reflected in the constitution adopted by Ohio, which pro- 
vided that "laws shall be passed taxing by a uniform rule all 
moneys, credits, investments in bonds, stocks, joint-stock com- 
panies or otherwise ; and also all real and personal property, 
according to its true value in money." 

One reason for the general acquiescence in the property tax 
was that during the first half of the century both state and local 
expenditures were small, so that the burden of taxation was com- 
paratively light. After 1850 the growth of cities increased the 
cost of local government, and during the Civil War both state and 
local outlays advanced at an unprecedented rate. After the close 
of the war the growth of state expenditures was checked, but 
local outlays steadily increased until the business depression fol- 
lowing the panic of 1873 led to a period of enforced retrenchment. 

In 1850 the total taxes levied in the state of New York for all 
purposes amounted to no more than $6,312,000 ; by i860 they had 
increased to $18,956,000, and in 1870 reached the figure of $50,- 
328,000. In Ohio the aggregate taxes, state and local, amounted 
to $4,227,000 in 1850, $10,817,000 in i860, and $23,463,000 in 
1870. In Massachusetts between 1861 and 1874 they rose from 
$8,284,000 to $33,674,000, the per capita charge advancing from 
$6.69 to $20.87. ^^^ the country at large the census shows that 
the aggregate taxes levied on property amounted to $94,186,000 
in i860, approximately $3 per capita ; while in 1870 they were not 
less than $280,591,000 or $7.28 per capita} 

A small part of the revenue needed to meet the greater cost 
of government came from new taxes, levied chiefly upon corpo- 
rations ; but probably nine-tenths of it was obtained by increasing 
the taxes on property. The $94,186,000 raised by ad valorem 

1 In Boston the per capita tax levy was $3.60 in 1820, ;^6.30 in 1840, $14.20 in 
i860, and $36.10 in 1870. 



288 SELECTED READINGS IN PUBLIC FINANCE 

levies on property in i860 represented an average tax rate of 
$7.80 per $1000 of the assessed valuation throughout the United 
States, while the $280,591,000 collected in 1870 meant a rate of 
$19.80 per $1000. In Massachusetts, according to Amasa 
Walker, the tax rates in the various towns and cities prior to 
the Civil War were seldom less than $6 per $1000, or more than 
$10 ; but the changed conditions after 1861 raised the taxes so 
that few towns and cities had a lower rate than $10 and some had 
as high a rate as $35. From official statistics it can be computed 
that the average tax rate in the state in 1861 was $8.29 per $1000, 
and that in 1874 it was $15.18. 

Obviously such a marked increase in rates intensified greatly 
the shortcomings of the property tax. Inequalities that could be 
borne when the rate was $5 or $6 per $1000 became intolerable 
when the rate advanced to $15, $20, and even $30. For property 
yielding 6 per cent interest, a tax of $6 per $1000 was equal to 
10 per cent of the income. This was a heavy rate for any direct 
tax, but could be paid without impoverishing the taxpayer, and 
might be submitted to, even though one knew that his neighbor, 
owning an equal amount of property, went almost scot-free. But 
a tax of $20 per $1000 claimed over 30 per cent of the income, 
and a tax of $30 claimed 50 per cent. Such a burden would be 
borne by no one who could manage to evade it ; and those unable 
to escape would hold it an intolerable grievance that many of 
their neighbors were almost untaxed. 

Under the circumstances the liveliest discontent was aroused ; 
and taxation, state and local, speedily acquired the status of a 
''problem." Between 1867 and 1874 six states appointed tax 
commissions to investigate the subject, and their example was 
subsequently followed by many others. From 1867 to 1897 not 
less than twenty-six commissions are known to have existed, and 
during the last decade there must have been at least a score more. 
The reports of these bodies disclose much diversity of opinion at 
many points, but upon one thing they are substantially unani- 
mous — existing methods of taxing personal property are satis- 
factory to no one. 

The discouraging feature of the situation is that the later re- 
ports give little evidence that progress has been made toward a 
satisfactory solution of the problems of state and local taxation. 
Most of the states have introduced inheritance taxes and not 



THE GENERAL PROPERTY TAX 289 

a few have established special taxes on corporations. In some 
considerable revenue is now obtained from liquor licenses ; and 
the Southern states impose license taxes on other forms of busi- 
ness. But, as we have seen, 82 per cent of the total taxes levied 
for state and local purposes come from the general property 
tax ; and in respect of this principal source of revenue we are 
but little better off than when the first commissions were ap- 
pointed. Tax laws, it is clear, change but slowly. The farmers 
oppose one project, the corporations another, the assessors an- 
other; irreconcilable diversity of local interests is encountered; 
business adjusts itself in some fashion to the established system, 
and dislikes the prospect of readjustment ; and any reform must 
overcome an astonishing amount of ignorance, selfishness, and 
stupid inertia. Thus it has come about that, after forty years' 
discussion, the United States has the most crude, inequitable, and 
unsatisfactory system of local taxation — if, indeed, we can call 
system that which more resembles chaos — that can be found in 
any important country in the civilized world. 

The objects upon which the property tax falls may be divided 
conveniently into three classes : real estate, tangible personalty, 
and intangible property. In the United States at large, real 
property constitutes about three-fourths of the aggregate. Of 
the $35,338,000,000 of property subject to local taxation, only 
$8,923,000,000 is classified as personal estate. In the assessment 
of personal property we have no means of ascertaining the pre- 
cise proportion which tangible wealth bore to intangible, but it 
was probably not less than 70 per cent of the total. In Massa- 
chusetts, where considerable intangible property is assessed, tan- 
gibles constitute about 55 per cent of the personal assessment ; 
but in many states so little intangible wealth is taxed that the 
proportion of tangible personalty rises to 75 or 80 per cent. 

While the results vary somewhat from state to state, according 
to the intelligence with which tax laws are drawn and adminis- 
tered, the general outcome is the same ; the weight of taxation 
falls mainly upon things that are visible and tangible, and chiefly 
upon real estate. In spite of the great increase of personal 
property during the last half-century, real property constitutes an 
ever-increasing proportion of the property assessed for local 
taxation. In 1850 the real property assessed in the entire country 



290 SELECTED READINGS IN PUBLIC FINANCE 

was valued at $3,899,000,000, and the personal property at $2,- 
125,000,000. In 1902 realty was assessed at $26,415,000,000, and 
personalty at only $8,932,000,000. In New York during this 
period the assessment of realty increased from $564,649,000 to 
$5,297,000,000, while that of personalty advanced from $150,- 
720,000 to no more than $672,149,000. In Massachusetts per- 
sonal property constituted over 36 per cent of the total local 
assessments in 1850, and less than 22 per cent in 1906 ; in Boston 
its proportion was 44 per cent in 1822 and 19 per cent in 1906. 
Local and temporary exceptions to the rule can be found ; but 
experience shows conclusively that, under the present system of 
property taxation, a larger and larger proportion of the burden 
falls upon real estate. 

Since real property is always assessed and yields a large 
revenue, it is often assumed that this part of our tax system has 
worked tolerably well ; and the subject is sometimes dismissed 
summarily, perhaps wnth a reference to Adam Smith's remark 
that "the quantity and value of the land which any man possesses 
can never be a secret, and can always be ascertained with great 
exactness." But although the value of land can be ascertained, it 
will not be discovered unless the assessment is entrusted to com- 
petent hands ; while in the valuation of many kinds of improve- 
ments very serious problems are often encountered. 

This important and difficult work is performed by boards of 
assessors locally elected or appointed. Sometimes chosen for 
political reasons, assessors are seldom selected with a view to 
their special qualifications for the position, and such knowledge 
of their duties as they possess is generally obtained during their 
term of office. Usually they are underpaid, receiving less than a 
competent man could earn in his ordinary vocation. They are 
always subject to more or less local pressure, particularly when 
elective officers, and in only a few commonwealths, and that 
recently, have the state governments exercised the least super- 
vision over the Avork of assessment. Careless and slipshod work, 
diversity of practice, ignorance of the exact provisions of the 
law, and stupid persistence in obsolete methods are some of the 
least evils that arise ; the worst are willful violation of the plain 
requirements of the law and actual corruption which has been 
known to make the office of assessor a highly lucrative position. 
Usually it is the system rather than the individual that is at 



THE GENERAL PROPERTY TAX 



291 



fault ; and the average assessor can fairly claim that he does 
about'as well as any other man would do under similar circum- 
stances. In some cities conditions are far better than in the 
country at large, but the general result is that we have a system 
of local option, each locality enforcing, ignoring, or deliberately 
violating the law as it may elect to do. 

The outcome is that ordinarily real estate is grossly under- 
valued. In the entire country the true value of taxable real 
estate was estimated to be $46,324,000,000 in the year 1900 ; but 
the assessed value in 1902 was but $26,415,000,000. In Nebraska 
the true value was $813,900,000 in 1900, and the assessed value 
in 1902 was $116,200,000 ; in Massachusetts, where the discrep- 
ancy was less than in any other state, the estimated true value 
was $2,559,300,000 and the assessed value, $2,434,800,000. Be- 
tween such extremes as these, the other states present all degrees 
of underassessment. 

If the percentage of undervaluation were the same in all 
counties or towns of any state, and the same for all parcels of 
realty in each county or town, no harm would be done ; but the 
fact is exactly the reverse of this assumption. In New York, 
in 1883, it was found that the average valuations of real property 
were as low as 18 per cent of the true value in some counties and 
as high as 100 per cent in others. In 1886 the valuations in the 
counties of Illinois were found to range from 5 to 100 per cent 
of the true value. In the cities of California, in 1902, the aver- 
age valuations varied from 26 to 95 per cent. Illustrations might 
be multiplied, but the result would always be the same ; and so 
long as undervaluation is permitted, real property will not be 
assessed at a uniform percentage of its true value in all parts 
of the same state. ^_,. 

Not less than half of the general revenue of the state govern- 
ments comes from the property tax, and it is clear that the bur- 
den will be unfairly distributed if property is assessed at 10 per 
cent of the value In one county and at 100 per cent in another. 
It is clear also that local assessors have a strong inducement 
to value real property at a low figure, since they thereby reduce 
the share of the state tax which falls upon their own towns or 
counties. To remedy such evils "boards of equalization" have 
been created in many states, and empowered to "equalize" the 
distribution of the state tax ; in Massachusetts this work was 



292 SELECTED READINGS IN PUBLIC FINANCE 

entrusted to a tax commissioner. But such boards have never 
reached the root of the difficulty, since they have no control over 
the original assessments and must proceed largely by guess- 
work. Politics sometimes vitiates their work, unseemly contests 
between urban and rural interests absorb time and attention, 
and it long ago became notorious that *' equalization fails to 
equalize." The result is that the burden of state taxation is dis- 
tributed unfairly, some localities being overtaxed and others 
undertaxed. 

In any locality where undervaluation prevails, the assessors are 
supposed to follow a general rule, and to assess real property at 
some uniform percentage of its true value. The average taxpayer, 
at any rate, assumes that this is done, and it is often maintained 
that, so far as the local tax burden is concerned, it is no one's 
business whether a town or county assesses property at lo, or 50, 
or 100 per cent of its true value. The law may expressly pre- 
scribe valuation at the *'true value in money" or the "fair cash 
value"; but ''what does a tax law amount to among neighbors, 
anyhow ? " Interference with such practices is hotly denounced 
as a violation of the sacred right of local misgovernment, and it 
is contended that the state should go no further than to readjust 
the quotas of the towns or counties in each state tax. 

But experience demonstrates to an absolute certainty that it is 
impossible to undervalue all real property at anything approach- 
ing a uniform percentage. An examination of several hundred 
thousand parcels of real estate in Wisconsin has recently shown 
that in districts where the average ratio of the assessed value to 
the true value is consistently maintained at 65 or 70 per cent, 
individual parcels are assessed as low as 20 per cent and as 
high as 120. In 1894 an investigation in Chicago disclosed that 
seventy of the costliest commercial buildings were assessed 
upon an average at 9.67 per cent of their true value; while 
it appeared that eighty cheap residential properties, worth 
from $400 to $4000, were assessed, upon an average, at 15.9 of 
their value. Among the commercial buildings the assessments 
ranged from 4.35 to 17.37 P^^ cent of the true value, and among 
the small dwelling houses they ran as low as 12 per cent and as 
high as 40. At one extreme we find an office building worth 
$1,677,000 and assessed at $73,000, while at the other we find a 
hovel which was assessed at $100 and actually sold for $250. 



THE GENERAL PROPERTY TAX 293 

In Adams County, Ohio, it has just been ascertained that 931 
parcels of real estate were assessed, upon an average, at 43.4 per 
cent of their true value ; and that 191 of them were assessed at 
an average value of 11.3 per cent, while 121 were assessed at 
an average value of 120.7. I^- Brown County the average valu- 
ation of 706 pieces of real estate was 53.3 per cent of the true 
value, while the individual properties were assessed as low as 
12.3 per cent and as high as 116.6 ; and in several other counties 
selected for investigation similar inequalities were brought to 
light. The moral seems to be that when assessors, with the 
best of intentions, attempt to undervalue property at a uniform 
rate they will assess some parcels of real estate from ten to twelve 
times as high as they assess others. 

There is a simple reason for the failure of this uniform- 
undervaluation plan to work as anticipated — even among friends 
and neighbors. If the practice is to assess realty at its true value, 
the assessor has a definite mark at which to aim, and the citizen 
a definite standard by which he can compare his assessment with 
his neighbor's ; but when the opposite practice prevails, assessor 
and taxpayer alike are left in uncertainty. Absolute accuracy, of 
course, is not to be expected, but errors can be more readily 
detected if the standard is full valuation. If two buildings 
worth $100,000 each are assessed, the one for $20,000 and the 
other for $18,000, the discrepancy seems to be but $2000; in 
reality it is $10,000, since it represents one-tenth part of the 
tax burden. 

In some states conditions are worse than others because sys- 
tematic reassessment of realty is undertaken only at long inter- 
vals. In the intervening years assessors may make certain 
changes, but the invariable result is that gross inequalities arise 
from fluctuations in real-estate values. In Ohio, for instance, re- 
valuation takes place only once in ten years ; and the report of 
a recent commission shows that between the decennial inquests 
farm lands change to building lots, and commercial centers of 
growing cities completely shift, so that fearful injustice ensues. 
Yet in states where annual assessment is the rule, as in Massa- 
chusetts, investigation has disclosed valuations ranging from 52 
to 133 per cent of the true value of realty in the same city. In- 
frequent valuations aggravate the evil, but are by no means the 
only cause of it. 



294 SELECTED READINGS IN PUBLIC FINANCE 

The first step toward effective supervision of local assessments 
was taken by Indiana in 1891, when a State Board of Tax Com- 
missioners was created. Unlike the ordinary boards of equaliza- 
tion, this body was given the power needed to make state control 
a reality ; that is, power to compel local assessors to comply with 
the requirements of the law. In 1899 a Board of Tax Commis- 
sioners was established in Michigan, and since then similar 
boards have been created in several other states. 

The results achieved by boards of this type have been very 
striking. In Indiana the total assessment of real estate was in- 
creased 44 per cent in a single year ; in Michigan it advanced 
the first year nearly 22 per cent ; in Wisconsin it increased from 
$528,572,000 in 1899 to $1,086,111,000 in 1902; in West Vir- 
ginia a general reassessment of property under state supervision 
raised the valuation of real estate from $168,480,000 in 1904 to 
$475,174,181 in 1906 ; and in the state of Washington in 1906 the 
assessment of all property was increased 62 per cent. This effec- 
tive state control of local assessments is perhaps the most im- 
portant and encouraging development in American taxation in 
recent years. It should be followed by an effort to improve the 
character and increase the compensation of local assessing boards 
throughout the country. 

The suggestion is often made that undervaluation of real prop- 
erty can be ended only by a complete separation of the sources 
of state and local revenue. It is thought that so long as a state 
tax is levied upon the property assessed by local officials, the 
temptation to undervalue real estate will be too strong to be 
resisted, since each town or county will hope thereby to reduce 
its quota of the tax levied for state purposes. But this argument 
overlooks the fact that the desire to reduce the local quota of the 
state tax is not the only reason for underassessment. Besides 
the state tax, the county taxes need to be equalized ; and in the 
country at large the taxes levied on property for county purposes 
are about 75 per cent larger than those levied for the support of 
the states ; in 1902 the figures were, respectively, $143,265,000 
and $82,320,000. It is clear, therefore, that the complete separa- 
tion of state and local revenues would not remove all temptation 
to undervaluation. The evil is more deep-seated than advocates 
of separation realize. Not the least of the reasons for the exist- 
ing practice is the fear of the taxpayers that if property is 



THE GENERAL PROPERTY TAX 295 

assessed at its true value, tax rates will not be correspondingly 
reduced and the politicians will simply have more money to 
spend. Upon the other hand, the experience of tax commissions 
of the modern type shows that effective state supervision of local 
assessors is likely to secure the desired results, even without 
separation of the sources of revenue. For many reasons it is 
desirable that the state levy upon property should be light, and 
the bulk of the state revenues obtained from taxes on corpora- 
tions and inheritances ; but there is no reason for supposing that 
with proper control of local assessments, the mere existence of a 
state tax will perpetuate the evil of undervaluation. 

Machinery, merchandise, and live stock make up the greater 
part of the tangible personal property assessed for local taxation ; 
but farm implements, agricultural products, household goods, 
personal effects, boats and vessels, and a few minor objects are 
also included in this category. Both in the requirements of the 
law and the practice of assessors the greatest diversity is found 
in the various states. 

Machinery is sometimes heavily taxed, as in the manufactur- 
ing cities of Massachusetts, where the tax rates run as high as 
$16, $18, or $20 per $1000, and the valuations are placed at a 
high figure. In Fall River, for instance, out of a total valuation 
of about $83,000,000, $31,000,000, or nearly 40 per cent, consists 
of personal property. More than nine-tenths of this personalty is 
tangible property, chiefly machinery ; and since the tax rate last 
reported was over $18 per $1000, it is evident that the city im- 
poses very heavy burdens upon the machinery employed in her 
leading industry. Upon the other hand, some states virtually 
exempt machinery. In Pennsylvania it is taxable only when of 
such a fixed character as to be regarded as part of the building ; 
and even then the local assessors deal very leniently with it. In 
New Jersey manufacturing plants and all their equipment were for- 
merly taxed at no more than 25 or 30 per cent of their true value, 
and the "Industrial Directory" of that state held this out as an 
inducement to manufacturers. Many states could exempt ma- 
chinery entirely without appreciable loss to their local revenues ; 
but in others, such as Massachusetts, this action would entail 
difficult readjustments in manufacturing districts. At present the 
diversity of practice places a decided handicap upon manufac- 



296 SELECTED READINGS IN PUBLIC FINANCE 

turers in any state where machinery is heavily taxed ; in such 
cases the best solution may be to tax this class of property at a 
fixed, uniform rate of moderate amount — say $8 in the thousand. 

In the taxation of merchandise we find again the widest diver- 
sity of conditions. Pennsylvania does not tax merchandise, but 
has a mercantile tax upon gross receipts. In Massachusetts the 
law requires that merchandise be assessed at its fair cash value 
on the first of May, a date when retailers' stocks are unusually 
large ; but in practice the assessors estimate the value according 
to such general indications as they can get of the volume of 
business and probable profits. In most states the assessment is 
supposed to be based upon the average amount of goods carried 
throughout the year. In Chicago some years ago the assessors 
adopted the practice of assessing business establishments rather 
upon the total volume of business transacted than upon the 
amount of personal property employed therein. Although the 
laws generally require a sworn statement from the taxpayer, 
assessors are usually content to make informal inquiries and then 
value the stock according to their best judgment. In practice 
this means guesswork, more or less intelligent, as the case may 
be. Five or six states allow an offset for debts, as in the case of 
other personal property; but usually no allowance is made for 
indebtedness. 

The results vary greatly. In cities a large part of the personal 
property listed for taxation often consists of merchandise. In 
Boston, for example, in 1907, personal property was assessed at 
$242,606,000, and of this amount $97,493,000 was located in two 
wards which are the heart of the mercantile district. Upon the 
other hand, in the entire state of Ohio the assessed value of 
"merchants' and manufacturers' stock" declined from $70,442,000 
in 1870 to $52,446,000 in 1906. When the tax falls upon stocks 
of retailers, it is readily shifted upon customers ; but if the mer- 
chant is engaged in wholesale trade, interstate competition may 
make such shifting difficult and produce complications similar 
to those noticed in connection with the taxation of machinery. 

Live stock usually contributes a substantial sum, but important 
exemptions are everywhere allowed, chiefly for young animals 
under the age of six months or a year. In states where the live 
stock or dairy industries are important the assessment of domestic 
animals is naturally large. In Wyoming real estate and the 



THE GENERAL PROPERTY TAX 297 

property of various corporations were assessed at $23,000,000 in 
1902 ; while live stock was assessed at $16,552,000, and all other 
personal property at $3,785,000. This of course was an excep- 
tional case. Yet in Iowa, the same year, real estate and corporate 
property were assessed at $463,700,000, and all other property at 
$109,900,000. Of this last sum, live stock represented $41,900,000, 
or nearly 40 per cent of all taxable property other than realty and 
the property of corporations. In Wisconsin at the same time all 
the personal property was assessed at $283,587,000, of which live 
stock constituted $72,793,000. In Texas the assessed value of all 
property other than real estate and the property of corporations 
was $273,000,000, and Hve stock represented $117,346,000 of this 
sum. 

The other items of tangible personal property are household 
goods, personal effects, wagons and carriages, agricultural prod- 
ucts, and boats and vessels. They are seldom a substantial part 
of the total assessment. Household goods up to a certain figure 
are often exempted, the exemptions ranging from $150 in Ala- 
bama to $1000 in Massachusetts. Wearing apparel, provisions, 
fuel, tools, and wagons usually receive certain exemptions. Grow- 
ing crops, hay needed to winter stock, and crops of the preceding 
year are also exempted in various states ; and when the date of 
assessment is May i or June i the amount of produce taxed in 
the hands of farmers is naturally small. In seaboard towns boats 
and vessels sometimes contribute heavily. In the city of New 
Bedford in 1861 the total assessment was $23,191,000, of which 
personal property constituted $14,005,000, or over 60 per cent. 
The greater part of this personal assessment represented the 
value of the vessels owned in that enterprising port ; and even 
to-day this class of property contributes a substantial sum to the 
local revenues. Ships engaged in the foreign carrying trade are 
in some states accorded exceptional favors, as, for instance, by 
the provision that they shall be taxed upon the income they yield 
rather than upon their capital value. In Massachusetts they are 
now taxable at about one-fifth of the rate imposed on other 
property. 

On the legal principle that personal property follows the owner 
and is taxable at his domicile, most of the states undertake to 
tax their citizens upon all personal property wherever situated — 
i.e.j within or without their borders. At the same time they 



298 SELECTED READINGS IN PUBLIC FINANCE 

generally lay claim to all tangible personalty within their jurisdic- 
tion, whether owned by residents or non-residents, so that this 
class of property, when located outside the state where the owner 
resides, is usually liable to double taxation. This injustice is 
avoided by some states which have expressly exempted personal 
property of their citizens permanently located and taxed in other 
jurisdictions ; in others the same rule has been established by 
judicial interpretation. But in intent, if not always in actual 
operation, the laws of most states sin against the most elementary 
rule of fair dealing. In New England, Massachusetts is a con- 
spicuous offender. Against this form of spoliation there long 
seemed to be no constitutional safeguard, even though the courts 
rarely construed a statute in such a way as to enforce double 
taxation unless the language was too clear to permit of doubt 
concerning its intention. Recently, however, the Supreme Court 
of the United States has laid down the rule (199U, S. 194) that 
a state cannot tax tangible property permanently located outside 
its borders. Over such property, the court declares, a state has no 
jurisdiction ; and to tax it is equivalent to depriving a citizen 
of his property without due process of law. 

Imperfect as our methods of taxing real estate and tangible 
personal property may be, they are perfection itself when com- 
pared with our attempts to tax intangible property. This con- 
sists of money, credits, and securities. 

Under modern conditions mere cash, money on hand, is a 
comparatively unimportant item in the inventory of the average 
taxpayer; but money on deposit^ would be a large one if it were 
assessed with even approximate accuracy and certainty. 

The uniform result is widespread evasion. In Ohio the de- 
posits in all banks exceed $500,000,000, and a large proportion 
must belong to persons subject to taxation in that state ; yet 
the amount of money on hand or on deposit which was returned 
to the assessors in 1906 was but $59,984,000. In Madison County, 
which had a population of 20,000, not less than $634,000 of 
money was assessed in 1906 ; while in Hamilton County, which 

1 In some states savings deposits are specially favored. In Massachusetts, for 
instance, they are exempted from taxation, and the savings banks are taxed at the 
rate of five mills on the dollar upon their deposits. Various exemptions reduce 
the average rate paid by the banks to two and one-half mills. 



THE GENERAL PROPERTY TAX 299 

had a population of 409,000, the assessment was $1,258,000. This 
was equivalent to a per capita return of $31 in the agricultural 
county, as compared with a return of $3 in the county which 
contained the city of Cincinnati. 

In Illinois, in 1897, Cook County, which had one-third of the 
real-estate valuation of the entire state and more than one-third 
of the population, returned one-tenth of the money assessed for 
taxation. In the capital city of the state of Washington, in 1903, 
a widow who had received $2000 of insurance money after the 
death of her husband returned more money for assessment than 
all the other taxpayers, including corporations. In that entire 
state in 1906 the bank deposits alone were estimated at $115,- 
505,000, while the total assessment of money and credits was 
$6,168,000. 

Credits generally include all debts due from solvent debtors, 
but in a few states accounts not bearing interest and the book 
accounts of merchants already taxed on their stock in trade have 
been#exempted. The unfairness of taxing credits without allow- 
ing persons to deduct their debts is so apparent that such de- 
duction is usually permitted. The result is, however, to throw 
open the door to evasion through the simple process of contract- 
ing fictitious debts and other devious devices. Apart from the 
single item of mortgages on real property, which are matters of 
record,^ the assessment of credits is usually small. In Wisconsin, 
for instance, a vigorous attempt to reach money and credits 
raised the total valuation of such property from $25,865,000 in 
1900 to $73,055,000 in 1902 ; but in the latter year not less than 
$50,000,000 of the entire assessment consisted of mortgages, and 
a considerable part of the balance was made up of money, so 
that the amount of credits other than mortgages was compara- 
tively insignificant. AMiolesale evasion, with its attendant in- 
equalities in the assessment of individuals and localities, is the 
general rule. In Ohio the total amount of credits, including 
mortgages, taxed in 1870 was $93,316,000, and in 1906 the assess- 

^ This is not to say that taxable mortgages are always assessed. Sometimes 
little effort is made to discover them. In 1889 the mortgage indebtedness of 
Wisconsin was ascertained to be ^82,461,000, and the whole assessment of money 
and credits was but $6,513,000. Even the strictest inquisition will not prevent 
evasion, since it is easy to loan money in the name of friends or relatives residing 
in other states, or even to organize a corporation under the laws of another state 
for the purpose of making such loans. 



300 SELECTED READINGS IN PUBLIC FINANCE 

ment had fallen to $77,230,000, although the wealth and popu- 
lation of the state had greatly increased. For the year last men- 
tioned in Preble County, which had a population of 23,713, the 
return of taxable credits was $2,169,000 ; while Hamilton County, 
with a population of 409,000, returned $1,676,000. The per capita 
return was $91 in the rural county, and $4 in the urban. In 
Holmes County the assessment of credits was $43 per capita, and 
in Cuyahoga County, which included the city of Cleveland, the 
assessment was less than $5. In the state of Washington the en- 
tire return of money and credits was but $6,168,000 in 1906, 
while the mortgage indebtedness resting upon real property in 
the state was $120,000,000. And elsewhere, investigation shows, 
the results are uniformly and monotonously the same. Only the 
smallest fraction of the taxable credits is listed by the assessors, 
and most atrocious injustice is inflicted upon the few taxpayers 
who cannot or will not escape. 

The taxation of securities is hardly rriore successful. A rigorous 
dooming law makes it possible to place arbitrary assessipents 
upon persons whose general scale of living gives evidence of the 
possession of taxable property; but it tends to drive taxpayers 
out of any district where the practice prevails, or leads them to 
protect themselves by making false or misleading returns. Gen- 
erally the tax a man pays is in inverse proportion to the secur- 
ities he owns, since small estates are assessed far more severely 
than large. A person holding $25,000 of stocks or bonds may be 
taxed upon $10,000 or $15,000, while one who owns $1,000,000 of 
such property is likely to escape with an assessment of $50,000 
or $100,000. When an assessment reaches $150,000 or $200,000 
the assessor usually feels that he has done his full duty, since he 
knows that a further increase is likely to drive the taxpayer into 
some other jurisdiction where there is not even a pretence of 
enforcing the law. Sworn returns are made chiefly by executors 
and trustees, who have le§s inducement to evade taxation, and are 
sometimes in a position where it is impossible to do so. Thus 
it comes about that the tax falls with its full weight mainly upon 
widows or orphans, the most helpless class in the community. 
If, ever, there was a system repugnant to the moral sense of 
decent men the existing methods of taxing securities are such 
a system. 

The taxation of intanmble wealth is so much of a farce that 



THE GENERAL PROPERTY TAX 301 

this class of property is usually a very small part of the total 
assessment. In 1902 the census obtained statistics of the money, 
credits, and securities^ assessed in many of the states, and the 
results are highly instructive. 

In fourteen states such property constituted from i to 5 per 
cent of the total assessed for taxation ; in ten the proportion 
ranged from 6 to 9 per cent, and in three it exceeded 10 per cent. 
In states where mortgages were exempt from taxation the pro- 
portion was less than 5 per cent, and in those which showed the 
highest proportion: of intangible property the principal item un- 
doubtedly was mortgages. Figures recently compiled for one 
other state, Massachusetts, show that in that commonwealth 
the intangible property locally assessed in 1906 was 9.4 per cent 
of the total.2 

Between individual taxpayers there is not the remotest ap- 
proach to equality and justice in the distribution of the burden. 
Everywhere one hears of small estates, generally belonging to 
widows or held by trustees, that pay a tax amounting to 30, 40, 
or even 50 per cent of the income from the property ; while large, 
estates go virtually untaxed. Official reports tell us that the 
system is "a farce, sham and humbug"; that "a. more unequal, 
unjust, and partial system could not well be devised" ; that the 
tax is virtually "a tax on ignorance and honesty" ; that 
"grievous wrongs are inflicted upon those least able to bear 
them"; that the law is made "the cover and excuse for the gross- 
est oppression and injustice." Nowhere in the civilized world 
can there be found a more crude, unscientific, ineffective, and 
inequitable method of raising public revenue. 

Even worse than the injustice of the system are the moral 
and political evils it produces. Almost everywhere taxpayers are, 
or may be, required to make sworn returns of their taxable prop- 
erty; and in proportion as this requirement is actually enforced 
one of two results is likely to ensue. Wealthier taxpayers consult 
their lawyers, and by innumerable devices are able to submit 

1 These figures do not include, of course, assessments of corporate properties 
levied directly upon the corporations themselves. We are not concerned here 
with the taxation of corporations, but merely with the taxation of securities as- 
sessed in the hands of the owners. 

2 Certain statistics are available also for two other states, Pennsylvania and 
Maryland. These are not given here because in both cases intangible property is 
taxed by a method different from that followed elsewhere. 



302 SELECTED READINGS IN PUBLIC FINANCE 

statements which are technically correct but actually misleading ; 
others, knowing nothing of such devices, resort to downright 
perjury as the only alternative to paying a tax that would take 
one-third or one-half of the income from good securities. The 
former method is the least objectionable of the two, but it places 
the taxpayer in the position of circumventing the law, and does 
not foster habits of good citizenship ; the latter is the cause of 
fearful demoralization. Here again official documents abound 
in testimony to the evils of the system. It is declared to be 
''debauching to the conscience and subversive of the public 
morals — a school of perjury promoted by law"; it ''puts a 
premium on perjury and a penalty on integrity"; it "debauches 
the moral sense," produces "widespread demoralization," and 
encourages "evasion and dishonesty." This is a severe arraign- 
ment, but no one familiar with the facts can doubt its truth. 

One of the most severe laws ever contrived for the purpose of 
enforcing the taxation of intangible property has been in oper- 
ation in Ohio for many years, and that state affords perhaps the 
best example of the iniquity and impracticability of the existing 
system. Besides requiring sworn returns of personal property, 
the law of Ohio authorizes any county auditor to summon a re- 
calcitrant citizen before a judge of the probate court, and makes 
it the duty of the judge to punish the citizen for contempt if he 
refuses to answer any question which the auditor may ask con- 
cerning his personal property subject to taxation. Nor is this all. 
The auditor may summon any other person, including the cashier 
of any bank, whom he may suppose to have knowledge of any 
taxpayer's affairs, and may compel him to testify under oath. 
Such an investigation may extend back over a period of five 
years; and the law provides that, in case of proved evasion or 
false statement, five years' back taxes may be collected, with an 
addition of 50 per cent, as a penalty. Since the average tax rate in 
Ohio at the present moment is 2^ per cent of the capital value of 
taxable property, it will be seen that, with the penalty included, 
the amount that may be recovered from a man who evades taxes 
for a period of five years amounts to no less than 18.75 P^^ cent 
of the entire value of his property. When such methods proved 
ineffective, the legislature finally authorized county officials to 
employ special agents to ferret out property escaping taxa- 
tion, these agents, known as tax inquisitors, receiving as com- 



THE GENERAL PROPERTY TAX 303 

pensation a percentage of the taxes recovered by their efforts. 

The chief result of these drastic methods was to drive wealthy 
citizens out of the state. Washington, D. C, received some of 
them, and many others migrated to New York and other states. 
The city of Cleveland is estimated to have lost millions of capital, 
and the value of high-class residential property in Euclid Avenue 
and in its vicinity depreciated 40 or 50 per cent.^ The immediate 
result of the tax-inquisitor system was to increase by a few mil- 
lions the assessment of intangible property throughout the state, 
but that effect was merely temporary, and for many years past 
the total assessment has either remained stationary or shown a 
tendency to decline. In 1870 the intangible property assessed in 
the entire state was $136,273,000 ; by 1880 it had declined to 
$131,562,000. Then, under the operation of the tax-inquisitor law, 
the assessment increased until it amounted to $162,500,000 in the 
year 1893 ; but since that time it has declined until in 1906 the 
total was only $147,900,000. The larger proportion of this prop- 
erty is assessed in the country districts, and only a small pro- 
portion in the cities. Hamilton County, which contains the city of 
Cincinnati, returned $17,460,000 in 1866, and but $4,434,000 in 1906. 
Cuyahoga County, containing the city of Cleveland, returned in 
1906 only $6,913,000; while Crawford County, with only 8 per 
cent of the population of Cuyahoga, returned $2,135,000, and 
Preble County, with less than 6 per cent of the population of 
Cuyahoga, returned $3,091,000. It is not easy to find words fit to 
characterize such a travesty upon all principles of political justice.^ 

In Massachusetts a less barbarous tax law has, by reason of 
better administration, yielded more substantial results than Ohio 
has achieved. In 1906 the assessment of intangible property in 
the former state was approximately $317,000,000, as against 
$147,900,000 in the latter. The showing was even more favorable 
to Massachusetts than these figures would indicate, since her 

^ From an address delivered by Mr. R. B. Smith before the Bankers' Club of 
Cincinnati in 1904, I take the following: "Thousands of the wealthiest men in 
Ohio have been driven out of it by its tax laws. In Cincinnati the names of a 
large number will readily occur to anyone familiar with its affairs. Can anyone 
recall the name of a single individual of means and leisure who has settled here 
within the last twenty years ? " 

2 In 1906 the Supreme Court of Ohio held that the tax-inquisitor law was uncon- 
stitutional. An attempt has been made recently by county authorities to revive the 
system in Cuyahoga County, but the legality of this action was contested. 



304 SELECTED READINGS IN PUBLIC FINANCE 

population was little more than two-thirds that of Ohio, while 
over one-third of the Ohio assessment must have consisted of 
mortgages, which are not taxed in Massachusetts. Yet no well- 
informed man supposes that the state reaches more than lo or 20 
per cent of the exceptionally large amount of intangible wealth 
belonging to her citizens ; indeed, there is reason for thinking 
that the proportion is less rather than more than 10 per cent. 
The inequalities that ensue are as shocking as those encountered 
in other states, especially in towns and cities in which the asses- 
sors are the most faithful in the pursuit of estates disclosed in 
the courts of probate, or in ''dooming" persons of moderate 
means who for various reasons are unable to change their place 
of residence. All the zeal of the assessors, however, does not 
prevent the gradual transference of the burden of taxation from 
personal to real property, precisely as in other states. In 1850 
personal property appears to have borne 36.6 per cent, of all the 
local taxes, and in 1906 it bore no more than 21.6 per cent.^ 

46. The Taxation of Property and Income in Massachusetts \^ 
by Charles J. Bullock. — The history of the general property tax 
in one of the oldest of the American states and the important 
modifications made in 1916 are set forth in the following extract : 

In principle the general property tax was established in Massa- 
chusetts by the well-known law of 1634 which provided that in all 
"rates and public charges" the towns should tax everyone accord- 
ing to his estate and with reference to "all other his abilities what- 
soever." The first detailed tax law, enacted in 1646, established a 
system of taxation upon "visible estate" real and personal, sup- 
plemented by a tax upon incomes of laborers, artificers and others, 
which in time developed into a tax upon incomes not derived 
from property. With these levies upon estates and incomes went 
the poll tax which had existed in the colony from the very begin- 
ning. The act of 1646, therefore, definitely established a system 
of direct taxation upon property, income, and polls, which con- 
tinued in operation without fundamental changes until 1862, and 
for the most part lasted until the twentieth century. 

1 Since 1861 the per capita assessment of personal property has declined. In 
that year it was ^249.86 ; in 1905 it was ^236.98. Outside of fourteen very wealthy 
towns \\iQ. per capita assessment declined from ^247.55 ^^ ^219.05. 

2 Reprinted from the Quarterly Journal of Economics^ Vol. XXXI, pp. 1-61. 



THE GENERAL PROPERTY TAX 305 

The operation of this tax system in the seventeenth century has 
been exhaustively studied by Professor Day/ who finds that it 
was customary to levy upon polls from 35 to 40 per cent of the 
direct taxes imposed for colonial and local purposes. In some 
communities the proportion was frequently greater than this, 
sometimes rising to 50 and even 60 per cent of the tax levy. 
Property, therefore, paid but 60 or 65 per cent of the direct 
taxes, and sometimes contributed 50 per cent or less. 

Until the very end of the century the property tax was confined 
to visible estates, which term, however, probably included money. 
In practice this meant that land, buildings, and live stock ac- 
counted for nearly the whole of the assessments. Since land 
values were low and there were few expensive buildings in the 
colony, the proportion of the taxes falling upon live stock was 
very heavy. Professor Day finds that such property often ac- 
counted for one-half, two-thirds, and even three-fourths of the 
whole assessment placed upon estates, with the result that per- 
sonalty frequently paid a larger proportion of the taxes than 
did realty. It may be estimated roughly that of every £100 of. 
direct taxes levied in a representative Massachusetts town in the 
seventeenth century, some £35 to £40 w^as levied upon polls, 
and that the remaining £60 to £65 was <:ontributed by real estate 
and live stock in proportions which varied but may not have 
been very unequal.^ Personal property other than live stock 
constituted in most towns an unimportant part of the assessment, 
and incomes usually were a negligible factor. 

The eighteenth century brought new conditions which 
gradually wrought material changes in the practical operation 
of the tax system. The proportion of direct taxation falling 
upon polls slightly decreased, since it became the general rule to 
levy one-third of the direct taxes upon polls and two-thirds upon 
property. Peculiar conditions sometimes made the poll taxes 
considerably higher or a little lower than this figure, but in the 
average town conditions probably conformed pretty closely to 
the intention of the law. 

.1 E. E. Day, History of the General Property Tax in Massachusetts, 1630-88. 
(Unpublished thesis, in Harvard University Library.) 

2 In Boston, for instance, Day finds that in 1676 real estate accounted for 62 
per cent of the total assessment of property, while in 1687 personalty accounted 
for 53 per cent. 



306 SELECTED READINGS IN PUBLIC FINANCE 

The great chang-e, however, was the advance of real estate to 
a commanding position upon the tax rolls. The frontier of settle- 
ment had been pushed forward into the Connecticut valley, and 
eastern Massachusetts was becoming a fairly populous and pros- 
perous community. Land values were rising, and houses better 
than American architects ordinarily produced in the nineteenth 
century were becoming common. As a result, the assessed value 
of real estate steadily rose, and personal property became of 
much less relative importance. In 1792 the assessment placed 
upon realty was £713,600, that upon personalty was £144,400, 
while property "doomed" by the assessors, which w^as largely 
personalty, was assessed at £81,100. If we assume all the 
"doomed" property to be personalty, we may compute that 
personal property accounted for 24 per cent of the total assess- 
I / ment and real estate for 76 per cent.^ Since one-third of the 
direct taxes was levied upon polls, we may compute that o£ 
every £100 of taxes levied in a Massachusetts town i^zYz ^^^^ 
upon polls, £505^ fell upon real estate, and £16 fell upon per- 
sonalty including income which was almost everywhere a 
negligible factor. 

Wolcott's Report enables us to divide the £144,400 of prop- 
erty recorded as personaFty into its component parts. Of this 
sum £66,300 represented live stock, £42,600 represented other 
tangible personalty, and £35,500 intangibles. What the £81,100 
of "doomed" personalty consisted of we can only conjecture; 
but we may believe that it was composed chiefly of merchants' 
stocks, money at interest and other intangibles, and perhaps 
incomes. In considering these figures it should be remembered 
that at this time property was placed upon the assessment roll 
at 6 per cent of its true value, with the exception of unimproved 
real estate, which was assessed at 2 per cent. 

Money was, doubtless, included in the visible estates for 
which inhabitants of Massachusetts were taxable in the seven- 
teenth century. At the very end of that period money at interest 
is mentioned by the annual tax acts, and during the eighteenth 
century intangible property became subject to taxation. When 
corporations developed, their shares were taxable, like other 
personalty ; but, as a gentle reminder to local assessors, the tax 
act for 1793 specifically mentioned bank stock. During the next 
1 See Wolcott's Report on Direct Taxes. State Papers, Finance, Vol. I, p. 451. 



THE GENERAL PROPERTY TAX 307 

decade shares of bridge or turnpike companies and other moneyed 
corporations received similar mention. The commercial develop- 
ment of the state was greatly increasing the amount and the 
importance of this class of property, and the growth of a consid- 
erable body of public securities at the same period tended to the 
same result. In 1790 Massachusetts had merchant princes whose 
fortunes were counted by the hundred thousands, and in some 
cases approached the figure of Si, 000,000. The money made 
in commerce soon overflowed into banking and manufacturing, 
and into bridge, turnpike, and canal companies, with the result 
that the amount of intangible personal property rapidly increased.^ 

From 1800 to 1850 the financial problems confronting Massa- 
chusetts were few and comparatively simple. When the federal 
government in 1790 assumed the greater part of the state debt, 
the burden of state taxation was reduced to an almost nominal 
figure.^ By 1850 conditions had somewhat changed, but the 
pressure of taxation was still comparatively light. In Boston the 
tax rate for that year was $6.80, and this figure was probably not 
far from the average for the state at large. In interpreting these 
figures it is necessary to consider the further fact that real-estate 
assessments were undoubtedly at a lower percentage of the true 
value than they are at the present day. While the matter has 
not been fully investigated, such evidence as we have indicates 
that in the average city or town prior to i860 realty was probably 
not assessed at more than 50 per cent of its true value. 

Under such conditions an easy-going administration of the tax 
laws sufiliced to place a substantial amount of personal property 
upon the assessment rolls. In Boston in 1794 over 57 per cent 
of the assessment appears to have consisted of personal property. 

1 This period is being exhaustively studied by Dr. H. H. Burbank, and will be 
treated in his book dealing with the history of the general property tax in Massa- 
chusetts since 1775. 

2 I have treated this subject in my monograph upon The Finances and Financial 
Policy of Massachusetts, chs. 2-4. The local governments were as yet undertaking 
few new functions, so that their expenses were comparatively light. The result 
was that the pressure of taxation was light and the general property tax met fairly 
well the requirements of the period. In Boston the tax levy of 1820 amounted to 
no more than ^3.60 per capita and the tax rate was but ^3.50. In 1840, after Boston 
had been a city for eighteen years and had greatly increased her expenditures, the 
tax levy was but $6.^0 per capita and the tax rate ^5.50. 



308 SELECTED READINGS IN PUBLIC FINANCE 

In 1810 the proportion of personalty was over 45 per cent, in 
1822 it was over 44 per cent, and as late as i860 it was nearly 
41 per cent. The per capita assessment of personal property in 
Boston was approximately $540 in 1804, and $635 in i860. For 
the state at large no figures are yet available between the years 
1792, when we have Wolcott's Report, and 1850, when we have 
the figures of the United States census. In the former year, as 
we have seen, if the property "doomed" by the assessors is 
counted as personal, 24 per cent of the total assessment con- 
sisted of personalty. In 1850 the census figures showed a total 
assessment of $551,000,000 of which nearly $202,000,000 was 
personal property, the percentage of personalty being 36.6. It 
appears, therefore, that between 1792 and 1850, at the time 
when intangible property first became an important factor in 
Massachusetts, the proportion which personal property bore to 
the total assessment rose from 24 to 36.6 per cent. 

What proportion of the increased assessment of personalty 
consisted of intangibles and what proportion consisted of mer- 
chants' stocks, machinery, live stock, and the very important 
item of ships and vessels, has not yet been ascertained. It may 
be that intangible property accounted for only a small part of 
the increase ; but so far as our present knowledge goes, we can 
say that there is no evidence that it was the growth of intangible 
property in Massachusetts which broke down the general prop- 
erty tax. Upon the contrary, during the period when intangibles 
became an important factor in the situation, the assessment of 
personal property showed both an absolute and relative increase. 
With low tax rates the assessors succeeded in reaching a sufficient 
amount of personal property to account for 40 per cent of the 
total assessments during the period. 

An important change in the distribution of the whole tax 
burden occurred in 1814 when the proportion of direct taxes 
assessed upon polls was reduced to one-sixth of the total levies. 
In 1850 we may estimate^ that of every $100 of local taxation, 
$16.67 'v^s.s levied upon polls, $52.80 was levied upon real estate, 
and $30.50 was levied upon personal property and income, the 

^ If the bank tax, which yielded the state ^354,700 in 1850, were added to the 
local taxes, the proportion of personal property in the total would be increased by 
perhaps six or seven dollars. But as we have no data concerning the taxes raised 
for local purposes, no accurate calculation can be made on this point. 



THE GENERAL PROPERTY TAX 309 

latter still being a negligible factor. If these figures are compared 
with those computed for 1792, it will be seen that the proportion 
which real estate formed of the total assessment had slightly in- 
creased, and that the decrease in the levy upon polls was made 
up chiefly by the increase in the assessment of personal property. 

The twenty-four years following 1850 were the critical period 
in the history of the general property tax in Massachusetts. The 
tax had met fairly well the requirements of the first half of the 
nineteenth century, but proved wholly inadequate for subsequent 
needs. All the evidence justifies the conclusion that it was the 
increase of public expenditures which caused the breakdown. 

The growth of cities, the emergence of new public needs, the 
unusual demands of the Civil War, and the period of public and 
private extravagance which continued until the panic of 1873, 
combined to produce an unprecedented increase in expenditures. 
The outlay of the state government was $566,100 in 1850, while 
in i860 it had increased to $1,193,000, and in 1868 had risen to 
$5,159,000. Thereafter it decreased to some extent, but at the 
end of a period of severe retrenchment stood at $3,907,000 in 
1880. Local expenditures followed the same general course. 
For 1850 no data are available, but w^e know that in 1861 the 
taxes levied upon property in Massachusetts amounted to 
$7,145,000, and that by 1874 they had risen to $27,830,000. The 
total taxes of all descriptions levied in the commonwealth 
amounted to $8,284,000 in the former year and to $33,674,000 in 
the latter ; while the per capita tax burden had risen from $6.69 
to $20.87.^ To make the situation worse, both state and local 
debts had shown a portentous increase, so that interest and sink- 
ing-fund charges were certain to complicate the financial problem 
of the future. 

The only possible result was a sharp increase of tax rates. 
In Boston the rate advanced from $6.80 per $1000 in 1850 to 
$9.30 in i860 and to $15.60 in 1874. In the entire state the 
average tax rate, which was $8.29 in 1861, was $15.18 in 1874. 
The strain of such high rates was greater than the existing sys- 
tem could possibly endure, and therefore taxation immediately 
became a "problem" in Massachusetts. 

1 These figures may be found in The Finances and Financial Policy of Massa- 
chusetts, pp. 46, 63, and 135. 



3IO SELECTED READINGS IN PUBLIC FINANCE 

One of the first readjustments required in the tax laws was a 
reduction of the poll tax. Since 1829 the law had provided that 
one-sixth of the state tax should be assessed upon polls, and that 
the same proportion should be followed in local taxes, provided, 
however, that the total poll tax levy for city, town, and county 
purposes should not exceed Si. 50. If one-sixth of the heavy 
taxes levied for state purposes during the Civil War had been 
levied upon polls, and the assessments for local purposes had 
approximated $1.50, the aggregate poll taxes would have risen 
to high figures. Therefore in 1862 it was enacted that the ag- 
gregate poll tax for all purposes, state and local, should not 
exceed $2, with a possible exception in the case of highway taxes 
separately assessed. Even under this law the poll tax, which in 
1861 had averaged $1.62, increased to $2.50 and $3 in many towns 
in 1864 and 1865 ; while such a rate as $4.25 was reported in one 
instance. For the entire state the average poll tax in 1865 was 
$2.11. With the tax limited in this manner, increases in local 
taxation thereafter fell wholly upon property ; and the poll tax 
became a factor of decreasing importance. 

The principal change that occurred during this period was the 
introduction of an extensive system of corporation taxes. In 
1812 Massachusetts had imposed a tax of i per cent upon the 
capital stock of state banks, and twenty years later had levied 
a retaliatory tax upon the agents of foreign insurance companies 
chartered in states that taxed the agents of Massachusetts com- 
panies. The bank tax soon yielded a handsome revenue, and 
was the mainstay of the state's finances during the Civil War. 
It seems to have been looked upon as a tax upon the privilege 
of issuing notes, since the shares of the banks remained taxable 
in the hands of the stockholders. The insurance taxes never pro- 
duced enough revenue to make them of financial significance. 
Up to 1862 Massachusetts had made no fundamental departure 
from the general property tax; and, except for comparatively 
unimportant exemptions, all property was subject to local 
taxation. 

But in the year just mentioned a law was enacted which 
exempted from taxation deposits in savings banks, and then im- 
posed upon the banks themselves an excise tax of one-half of 
I per cent. Although this rate was subsequently increased, then 
reduced, then increased, and finally restored to the original 



THE GENERAL PROPERTY TAX 311 

figure, it was always less than the average rate imposed upon 
other property in Massachusetts ; and as local tax rates increased, 
it finally fell to less than one-third of the average rate of taxa- 
tion. It therefore established a separate classification for savings- 
bank deposits, justified no doubt upon the theory that such 
property was entitled to special consideration, but marking none 
the less a deliberate departure from the principle of the general 
property tax. It also raised interesting and important constitu- 
tional questions. 

The earliest tax laws of the colony of Massachusetts had been 
based upon the English system of local taxation. That system 
had been based upon the principle of equal, proportionable, and 
ratable taxation according to the abilities of the citizens, but 
had not always employed the same measure of ability.^ The 
earliest Massachusetts tax laws provided in almost identical lan- 
guage for equal and proportionable rating of the inhabitants of 
Massachusetts, and selected visible estates as the measure of the 
citizens' contributions. It, therefore, naturally happened that 
the province charter of 1691 contained a provision authorizing 
the general court to levy *' proportionable and reasonable assess- 
ments, rates, and taxes." What the word "proportionable" 
meant to the person who inserted it in the charter, we do not 
know ; but we do know that the word was never so construed as 
to prevent the province from classifying property for taxation. 
On the contrary, the provincial tax laws repeatedly classified 
property and continued to do so down to the time of the Revo- 
lution. Real estate was usually required to be assessed at six 
times the annual income. Live stock was assessed at arbitrary 
valuations fixed by law, and other personal property practically 
according to the judgment and discretion of the assessors. 

The constitution adopted by Massachusetts in 1780 took over 
from the provincial charter the provision that the general court 
should have the power to levy "proportional and reasonable 
assessments, rates and taxes." If it had stopped there, it might 
never have been so construed as to prevent classification of the 
objects of taxation, because the colony and province had always 
levied excise and import duties, and the state continued to do so. 

1 Cannan's History of Local Rates in England gives sufficient evidence con- 
cerning the sources upon which the authors of the earliest Massachusetts laws 
drew. "• 



312 SELECTED READINGS IN PUBLIC FINANCE 

It would probably have been evident to any court that the fram- 
ers of the constitution had not intended to invalidate the existing 
system of excise and customs taxes, and it is therefore unlikely 
that the constitutional requirement that taxes shall be '* propor- 
tional" would have been construed so strictly as to make excise 
and customs duties unconstitutional. But after conferring upon 
the general court the same taxing power that the province of 
Massachusetts had always exercised, the framers of the consti- 
tution inserted an additional provision authorizing the levy of 
''reasonable duties and excises." This action may have been 
due to a fear or belief that, without specific authorization of 
duties and excises, the general court might be unable to levy such 
imposts. But this caution was probably unnecessary. The taxa- 
tion system of Massachusetts had never been proportional in any 
mathematical sense, and it had always included excise and 
customs duties, to which it would have been practically impos- 
sible to apply any requirement of proportionality. The excise 
clause, therefore, was probably unnecessary, and could have no 
other effect than to oblige the courts to find a reason for the 
inclusion of the word ''proportional" in the clause relating to 
direct taxes and for its exclusion from the clause relating to 
duties and excises. 

Whatever the framers may have intended, the second tax act^ 
enacted after the adoption of the constitution provided that all 
property except unimproved lands should be assessed at 6 per 
cent of its real value, and that such lands should be assessed at 
2 per cent. This was obviously a classification of property, and 
it continued to be the law of the commonwealth until its repeal 
in 1828 without any question being raised concerning its con- 
stitutionality. Another law of 1781^ levied a duty upon coaches, 
chariots, and carriages, and required the inhabitants of the 
commonwealth under oath to make returns of such property to 
the' local assessors. This was in everything except name a direct 
tax upon property, and could not have been upheld as an excise 
or duty except under such a broad construction of those terms 
as to render meaningless the distinction between the taxing power 
and the excise power. It also passed without question. 

The meaning of the word "proportional" was considered by 
the Supreme Court for the first time in the case of Portland 
1 Ch. 16 of 1781. 2 ch. 17 of 1781. 



THE GENERAL PROPERTY TAX 313 

Bank V. Apthorp (12 Mass., 252), which involved the constitu- 
tionaUty of the tax levied upon state banks in 1812. The court 
upheld this tax as an excise, but took occasion to say that it 
could not be sustained as a tax because it was not proportional. 
Although this was a mere dictum, it inevitably carried great 
weight fifty years later when the next case arose; and yet if 
the dictum of the court was correct, it followed that the province 
of Massachusetts had never had anything remotely resembling 
a proportional system of taxation, and that the legislature of the 
state only a year after the adoption of the constitution had estab- 
lished an unconstitutional classification of real estate which was 
still in force, and under the guise of an excise had levied an un- 
constitutional tax upon certain other classes of property. 

When the savings-bank tax came up for consideration, the 
court, following the reasoning of Portland Bank v. Apthorp, up- 
held it^ as an excise or duty on the franchises of the banks, even 
though, unlike the bank tax of 1812, it was in lieu of local taxa- 
tion of the deposits. The earlier decision had merely upheld an 
excise that was in addition to the property tax. The latter, how- 
ever, made it possible for the legislature, wherever it could levy 
a valid excise, to exempt from local taxation the property which 
in effect had been excised. The door was opened, therefore, for 
a considerable extension of the excise power, and the legislature 
soon took advantage of the opportunity. Another important ef- 
fect of the decision was to commit the court to the general line 
of reasoning followed in the earlier case, and to make it probable 
that, if the question ever arose, the dictum laid down in Portland 
Bank V. Apthorp would become a decision to the effect that a tax, 
in order to be constitutional, must be proportional in the strictest 
sense of that w^ord. 

Cases involving this question were not long in coming before 
the court, and it was presently held that the constitution required 
taxes on property to be so laid that, "taking 'all the estates 
lying within the commonwealth' as one of the elements of pro- 
portion, each taxpayer should be obliged to bear only such part 
of the general burden as the property owned by him bore to 
the whole simi to be raised."^ Thus the tax clause of the con- 

J 5 Allen, 428, 431, and 433. 

2 Oliver V. Washin^on Afills, ii Allen, 275. See also 12 Allen, 298 and 312 ; 
118 Mass., 386; 133 Mass.", 161 ; 134 Mass., 424; 195 Mass., 607. 



314 SELECTED READINGS IN PUBLIC FINANCE 

stitution was finally interpreted in such a manner as to make it 
prescribe strict uniformity in taxation. 

In 1864 the general corporation tax was enacted, and, like 
the savings-bank tax,- was sustained by the court as a valid 
excise. As is well known, it left the real estate and machinery 
of corporations subject to local taxation, and then imposed upon 
corporations a franchise tax which was to be assessed upon 
the so-called ''corporate excess," or the amount by which the 
value of the capital stock exceeded the value of the real estate 
and machinery locally assessed. As the shares of the corporations 
were thereafter exempt from local taxation and the corporation 
tax was administered by the state, the law of 1864 introduced 
another radical change in the tax system of Massachusetts. But 
since the rate of taxation on the corporate excess was the average 
rate levied upon property in the commonwealth, the law involved 
no departure from the principle of the general property tax, and 
in this respect differed radically from the tax on savings banks. 
Except for the arrangement by which double taxation of the stock 
and of certain tangible property of corporations was avoided,^ 
the only real change wrought by the law of 1864 was that there- 
after the state dealt directly with corporations and the stockhold- 
ers were exempted from local taxation. The change effected, 
therefore, was chiefly of an administrative character, and there 
was no intention that corporations should pay either more or less 
taxes than the general mass of property subject to local taxation. 

The establishment of the national banking system was followed 
by the conversion of state into national banks, and this required 
changes in the tax law. The final outcome was the establish- 
ment in 1873 of the present tax upon the shares of national banks, 
which, being levied at the local rates of taxation, results theo- 
retically in taxing banks in the same manner as other property. 
In 1874, therefore, Massachusetts was collecting from the savings 
bank, the general corporation, and the national-bank taxes $4,- 
875,000 of revenue, which was over seven times the revenue de- 
rived from the old bank tax in 1861. The system had begun to 
be diversified, but except in the case of savings banks no de- 

1 Manufacturing corporations had been relieved from double taxation in 1832 
by a law (ch. 158 of 1832) which provided that, in assessing the stock of such 
corporations, the local assessors should make a suitable deduction for the value 
of real estate and machinery already taxed. 



THE GENERAL PROPERTY TAX 315 

parture had been made from the principle of the general 
property tax. 

Without doubt the new taxes were more effective in reaching 
corporate property than the old methods of local assessment, so 
that perhaps the greater part of the revenue derived therefrom 
in 1874 represented an increase of financial resources. But this 
increase had not been sufficient, as we have seen, to prevent a 
rise of local tax rates under which conditions were rapidly going 
from bad to worse. 

Boston was probably the first and also the chief sufferer. Mr. 
Thomas Hills, an able and determined advocate of the general 
property tax, was made one of the principal assessors in 1865, 
and in 1866 became chairman of the board. He increased greatly 
the efficiency of the assessing department, and inaugurated a 
vigorous search for taxable property under which Boston valua- 
tions rapidly increased. In i860 the real estate of the city had 
been assessed at $163,891,000 and the personal property at $112,- 
969,000. In 1865 these figures had been increased, respectively, 
to $201,628,000 and $170,263,000. By 1870 Mr. Hills had raised 
the real-estate assessment to $365,593,000 and the personal to 
$218,496,000; and in 1872 had raised the former to $443,283,000 
and the latter to $239,440,000. Account must be taken, of course, 
of the annexation of Roxbury and Dorchester, which added 
materially to the total valuation ; but even when this is done, the 
results secured by Mr. Hills were sufficiently striking. 

But things were not working out as expected because personal 
property was rapidly migrating from Boston. Removals to the 
suburbs had been going on for many years, as is evidenced by 
the fact that before the middle of the eighteenth century it was 
necessary to amend the tax laws by providing that merchandise 
employed in any city or town should be taxable in that place and 
not at the domicile of the merchant. But under Mr. Hills there 
ensued a veritable hegira under which the attractive suburbs of 
Boston were rapidly built up at the expense of the city's tax rolls. 
The most striking case was that of Nahant, which in 1865 had 
assessed $5x3,000 of real property and $12,710 of personal, its 
tax rate standing at $15 per $1000. In 1870, however, thanks 
to Mr. Hills, its realty was assessed at $985,000 and its personalty 
at $4,160,000, while its tax rate had dropped to $2.50 per $1000. 
Between 1869 and 1873 not less than $13,900,000 of taxable per- 



3i6 SELECTED READINGS IN PUBLIC FINANCE 

sonal estate was removed from Boston to eight suburban towns 
and to Newport, Rhode Island. Naturally enough, in time, such 
removals more than offset the diligence of Mr. Hills and his 
minions. The assessment of personal property reached high- 
water mark in 1874, when it stood at $244,554,000. Thereafter 
it steadily decreased until it reached low-water mark in 1879 at 
$184,545,000. But even in 1874 Mr. Hills had failed to increase 
the proportion of the taxes paid by personal property. In i860 
personalty constituted over 40 per cent of the total assessment, 
and in 1865 formed even a larger percentage. But in 1874, 
although the total personal assessment had increased by some 
$74,000,000, the assessment of real estate had been raised 175 
per cent, with the result that personal property formed less than 
31 per cent of the total assessment. 

In the entire state, as we have seen, personal property had 
constituted over 36 per cent of the local assessments of $551,- 
000,000 in 1850. By 1874, however, it accounted for 29.6 per cent 
of the total assessment of $1,831,600,000. A.llowance should be 
made for the fact that the savings bank, the general corporation, 
and the national-bank taxes had removed a large amount of 
property from the category of "taxables," but only a small 
proportion of such property had ever been placed upon the 
assessment lists, and therefore the corporation taxes made com- 
paratively little difference with the local assessments. In 1861, 
for instance, the deposits in the savings banks of Massachusetts 
amounted to $44,785,000, and of this sum the local assessors had 
taxed only $9,655,000. No similar comprehensive data concern- 
ing local taxation of the stock of Massachusetts corporations and 
of national banks are available; but in 1864 when, under the 
operation of the general corporation tax, the shares of Massa- 
chusetts corporations were exempted from taxation, the local 
assessments upon personal property decreased only from $343,- 
500,000 to $324,600,000. In 1873, also, when the bank tax went 
into operation, the local assessments upon personal property 
decreased from $565,294,000 to $537,388,000. While, therefore, 
the total assessment of personal property for local taxation in 
1874 would have been somewhat larger but for the changes 
wrought by the new corporation taxes, there had been a gradual 
shifting of taxation from personalty to real estate. Even if we 
estimate the reductions caused by the corporation taxes at the 



THE GENERAL PROPERTY TAX 317 

very generous figure of $70,000,000, there would still remain a 
shrinkage of some 2 per cent, in the proportion which personal 
property bore to the total local assessments. For a time, how- 
ever, this tendency was probably offset by the fact that the new 
corporation taxes succeeded in reaching taxable values which 
would have eluded local assessment. 

Since the poll tax was now fixed at what was practically a 
uniform charge of $2, the burden of taxation had shifted very 
greatly from polls to property. In 1874 polls were assessed for 
$877,700 in a total of $33,556,000, or for no more than 2>^ per 
cent, which contrasts strikingly with the proportion of 16/^ 
per cent established by the law of 1814.^ The taxes paid by cor- 
porations amounted to $4,875,000 in 1874, and constituted 14^ 
per cent of the total. Local taxes upon personal property 
amounted to $8,229,000, or 24.6 per cent ; and those assessed upon 
real estate were $19,573,000, or 58.4 per cent. Thus it appears 
that the reduction in the proportion of the taxes falling upon 
polls had been made up by the new corporation taxes ; polls and 
corporations were paying in 1874 fully 17 per cent of the total 
taxes, whereas polls were required to contribute 16/^ per cent 
under the law of 18 14, and somewhat less than that under the 
law of 1829. But the corporation taxes were in effect taxes levied 
upon property, so that what the figures really show is that the 
proportion of the total taxes falling upon property had increased 
from 87, y^ per cent in the early part of the nineteenth century to 
97^2 per cent in the year 1874. 

If we asstijiie that the whole of the corporation taxes were 
levied in respect of personal property,^ and therefore combine 
them with the taxes levied locally upon personalty, we find that 
the total contribution of personal property was $13,105,000, or 
39.1 per cent of all the taxes levied in the commonwealth. This 

1 Of course the limitation placed by the Act of 1829 upon the local levy on 
polls tended to reduce appreciably the proportion of the total taxes falling upon 
polls, but up to 1850 the increase in the amount of taxes levied had probably not 
been sufficient to reduce the poll tax to a negligible factor. 

2 In fact, some part of the general cor^Doration tax represented real-estate values, 
since, under a decision of the Supreme Court, the right of way of railroads and 
some other classes of public-service corporations is exempt from local taxation. 
This decision had relieved such property from taxation up to 1864, but after that 
it merely increased the taxable corporate excess upon which the general corporation 
tax was Ifivied. See Quarterly Journal of Economics, Vol. XXI, pp. 185 and 218, 



3i8 SELECTED READINGS IN PUBLIC FINANCE 

left 584 per cent of the total taxes to be paid by real estate. 
Compared with 1850, therefore, we find that the contribution of 
personal property to the total public revenue, state and local, had 
increased to 39.1 per cent, while the contribution of real estate 
had increased to 58.4 per cent. 

Following the critical period which ended in 1874 came thirty- 
three years of comparative calm during which disintegration of 
the general property tax gradually and quietly continued. In 
1874 dissatisfaction with the working of the tax laws led to the 
appointment of the first special commission to investigate the 
subject. This commission was composed of able men and sub- 
mitted in January, 1875, a report which is replete with informa- 
tion. It w^as, however, dominated in its thought by Mr. Hills, 
who seems to have been the most influential as well as the most 
active member. The report recognizes existing evils, but does 
not understand their cause. It assails vigorously the proposal, 
made by the New^ York tax commission of 1871, to exempt per- 
sonal property from taxation, and recommends merely changes 
in various details of the tax laws. For the evils attending the 
taxation of personal property the commission could make no 
more hopeful recommendations than that certain changes be 
made in the provisions of the law relating to offsets for indebted- 
ness and the matter of domicile.^ It was unfortunate for the com- 
monwealth that its tax laws could not be radically altered in 
1875, but the principle of the general property tax was un- 
doubtedly approved by all but a small minority, an^ that minor- 
ity had little more to propose than exemption measures designed 
to relieve certain kinds of personal property from taxation. All 
things considered, it seems probable that Mr. Hills and his as- 
sociates voiced very faithfully the prevailing opinion of the state. 

In the years that followed, discussion of tax problems was 
confined principally to the subject of double taxation. An or- 
ganized effort was made to bring about the exemption of mort- 
gages secured by Massachusetts real estate; and this was 
practically accomplished in 1881, when the present law upon that 
subject was enacted. Under that act a note secured by a mort- 

1 Report of the Commissioners appointed to inquire into the Expediency of 
revising and amending the Laws relating to Taxation and Exemption, pp. loi, 121. 
H. Doc. 15 of 1875. -- 



THE GENERAL PROPERTY TAX 319 

gage of taxable real estate in Massachusetts is exempt from 
taxation as personal property ; and the interest of the mortgagee 
in the real estate is taxable to him as real estate in the place 
where the land lies, while the mortgagor is taxable only for his 
equity in the property. Since, however, the law does not pro- 
hibit contracting out, mortgages invariably provide that the 
mortgagor shall assume all taxes ; and the practical result is that 
real estate is taxed to the mortgagor at its full value, while the 
mortgage note is exempt. This law had the effect of exempting 
from taxation about $48,000,000 of mortgage debts reported as 
assessed for taxation in 1881. But the assessment of personal 
property throughout the state decreased by only $3,600,000 in 
1882, and the following year it was $6,900,000 larger than it had 
been before mortgages were exempted.^ 

Advocates of the general property tax interpreted these figures 
as meaning that the loss of $48,000,000 of taxable mortgages was 
offset by the natural increase of other personal property, and 
reasoned as if the assessment for 1883 might have been not 
$6,900,000 but $54,900,000 greater than the assessment for 1881 
if mortgages had not been exempt. In fact, however, things 
would not have worked out that way. The exemption of mort- 
gages nominally relieved $48,000,000 of personal property from 
local taxation. But, in reality, very few of the owners of such 
property had previously been assessed for their entire personal 
estates as the law directed, or had made returns of their taxable 
property. Except in cases where a person's property consisted 
largely of mortgages and he could therefore make a return to 
his assessors that reduced his taxable personalty below the 
amount for which he was assessed in 1881, taxpayers who had 
been "doomed" for a given amount of personal property in 
3881 had no interest in coming forward in 1882 with statements 
of their taxable personalty. They were presumably assessed for 
as much personal estate as in 1881, and therefore received no 
benefit from the mortgage exemption. The situation was like 
that which developed later when, in order to encourage forestry, 
new plantations were exempted from taxation for a stated period 
of years. This exemption was of absolutely no benefit to the 

1 These figures, as well as those given above concerning the operation of the 
corporation taxes^ may be found on pp. 36-38 of the Report of the Commission 
on Taxation of 1907. 



320 SELECTED READINGS IN PUBLIC FINANCE 

average farmer, because his farm was usually assessed for some- 
what less than it was worth and the assessors could add to the 
rest of the farm all that they were obliged to take off from the 
plantation. We are not to suppose, therefore, that, if mortgages 
had not been exempted in 1881, the assessment of personal prop- 
erty in 1883 would have increased by $54,900,000 instead of 
$6,900,000 as it actually did. 

After 1 88 1 few changes in the tax laws occurred for many 
years. Until 1906, indeed, the only significant development was 
the introduction, in 1891, of a tax upon collateral inheritances 
and successions. In point of fact, tax legislation in Massachusetts 
was in a state of deadlock. 

Advocates of change, who were increasing in numbers, labored 
to secure the exemption of foreign corporation stocks, and some- 
times urged the total exemption of all intangible property. Upon 
the other hand, the assessors of the state, who numbered con- 
siderably more than 1000, had been organized by Mr. Hills and 
others into a state-wide association which was able to offer de- 
termined resistance to any and all exemption measures. 

Advocates of the existing system proposed various measures 
to make the tax laws more effective, of which the most important 
were the appointment of assessors by some state authority and 
the taxation of personal property at a uniform rate which should 
be the average imposed upon real estate subject to local taxation. 
Either of these measures would have wrought havoc to the 
state, since the time had passed when it was possible to enforce 
the taxation of personal property at the prevailing local rates or 
at an average state rate. Such taxation would have meant con- 
fiscation of one-third or one-fourth of the taxpayers' incomes and 
would have led to wholesale removals of property from Massa- 
chusetts. As things stood, the tax laws resulted in what was 
aptly described as a "system of confiscation tempered by favor- 
itism." The legislature was not disposed to grant further exemp- 
tions that might increase the burdens falling upon taxable 
property ; and, upon the other hand, it probably realized, that 
the existing laws were not capable of strict enforcement, and 
therefore was not disposed to adopt the drastic measures favored 
by the assessors. 

In 1893 a joint special committee of the legislature was ap- 
pointed to revise the laws relating to taxation, and'the following 



THE GENERAL PROPERTY TAX 321 

year reported against radical changes in the taxation of prop- 
erty/ But conditions were going from bad to worse, so that 
in 1896 a special commission was appointed to inquire into the 
expediency of revising the tax laws. The following year this 
commission submitted a noteworthy report which grappled 
squarely with the problem confronting the commonwealth. It 
investigated searchingly the practical operation of the existing 
system, and recommended that intangible property be exempted 
from taxation. It realized, however, that a substitute or sub- 
stitutes should be found for the tax upon intangibles, and 
therefore recommended that the inheritance tax should be ex- 
tended to direct inheritances, and that a habitation tax should be 
introduced which should be levied upon house rentals in excess 
of S400.2 

Although this plan provided substitutes for the existing tax 
upon intangible property, the legislature was not ready for radical 
departures from the existing system, and therefore the recom- 
mendations of the commission bore no immediate fruit. But the 
report effectively exposed the evils of the existing system, and 
pointed out their cause. It therefore served as the starting-point 
for subsequent discussion, and proved to be a document of great 
educational value. In 1906 another joint-special committee on 
taxation was appointed which recommended no radical changes 
in the property tax but advocated the taxation of direct in- 
heritances, which was finally carried into effect by an act of 
1907.^ A minority of the committee, reverting to the recom- 
mendations of the commission of 1896, advocated the exemp- 
tion of intangible property from taxation but proposed no 
substitute. 

Meanwhile, the general property tax was steadily disintegrating 
and producing- conditions which were certain to lead ultimately 
to revision of the tax laws. Public expenditures, which had 

1 Sen. Doc. 9 of 1894. The above statement relates to the majority of the com- 
mittee. Minority reports favored the exemption of stock of foreign corporations 
and the exemption of state and municipal bonds. 

2 Report of the Commission appointed to inquire into the Expediency of 
revising and amending the Laws of the Commonwealth relating to Taxation, p. 120 
(Boston, 1897). The Commission also recommended that the state should retain in its 
treasury the revenue from the general corporation tax, and should then assume county 
expenses. 

3 Report of the Joint-Special Committee on Taxation (Boston, 1907). 



322 SELECTED READINGS IN PUBLIC FINANCE 

.greatly declined during the period of retrenchment following 
1874, were again upon the increase. The total taxes of all de- 
scriptions levied in the commonwealth had decreased from $33,- 
674,000 in 1874 to $25,714,000 in 1879, but by 1890 they had 
risen to $39,731,000, and by 1905 had reached the imposing total 
of $72,121,000. The per capita tax burden, which in 1874 had 
been $20.87, in 1905 was $24.01, and local tax rates were again 
increasing. From 1874 to 1879, during the period of enforced 
economy, the average tax rate in the state had declined from 
$15.51 per $1000 to $12.78. During the next fifteen years the 
average hovered around $15, but by 1900 it had risen to $16.14, 
and in 1905 it stood at $17.25. Under such conditions the evils 
which were serious enough in 1874 were gradually becoming 
intolerable. 

One result of the heavier pressure of taxation was an increase 
in real-estate valuations, especially in the cities. The mere desire 
to obtain revenue without undue increase of tax rates would 
have led, in any event, to somewhat higher valuations ; but this 
tendency was increased by the operation of the law of 1875 
limiting city debts, and that of 1885 limiting city tax rates. 
Under these acts many cities were obliged to increase real-estate 
valuations in order to provide the necessary margin for loans and 
to keep tax rates within the specified limit. If this had resulted 
merely in changing the old-fashioned practice of valuing prop- 
erty at "about" one-half or two-thirds of what it was worth, 
it would have been a matter for congratulation. But in some 
cities it finally resulted in valuations so high as to be clearly 
excessive. There are to-day within the metropolitan district not 
a few municipalities in which it is difficult to sell real estate 
for its assessed valuation and transfers are frequently made at 
much lower figures. 

Tangible personal property was seriously affected by the high 
rates of taxation, but in many cases had a comparatively easy 
method of escape, namely, incorporation. Merchants and manu- 
facturers who found themselves more heavily taxed upon their 
goods, wares, or merchandise than their competitors in other 
states could incorporate under the laws of the commonwealth 
and come under the general corporation tax. Under this tax 
real estate and machinery remained subject to local taxation, and 
the rest of the property of corporations was supposed to be fully 



THE GENERAL PROPERTY TAX 323 

reached by the tax which, the state levied upon the so-called 
"corporate excess." In practice, however, it developed that 
whereas an individual or a firm was taxable upon all property 
without deduction of debts except against the item of credits, 
the corporation was able to deduct the whole of its indebtedness 
from its assets taxable under the corporation tax. This circum- 
stance, with others, brought it about that in 1902 the manufac- 
turing and mercantile companies subject to the corporation tax 
owned merchandise valued at $143,604,000, and had a taxable 
corporate excess of no more than $104,238,000. It is clear, there- 
fore, that the effect of the corporation tax was even at that time 
to enable incorporated companies to reduce the tax upon their 
merchandise, or at any rate to reduce it below what it would 
be if the local assessors assessed it at its true value. In 1903 a 
maximum limit was placed upon the corporate excess, which 
had the effect of enabling many concerns to secure a further 
reduction of their taxes. While in individual cases the corpora- 
tion tax was fully as heavy as the local tax upon unincorporated 
enterprises, and in some cases even heavier, there can be no 
doubt that, upon the whole, manufacturing and mercantile con- 
cerns found incorporation an easy method of escape from in- 
creasing burdens of local taxation.^ In extreme cases it was 
possible to arrange matters so that an incorporated mercantile 
concern secured exemption from local taxation upon its mer- 
chandise, and then, after deducting its debts, had no corporate 
excess to be taxed by the state. 

Other kinds of tangible personalty did not fare so well. Live 
stock is employed in an industry where incorporation is highly 
uncommon. Machinery is expressly excepted from the operation 
of the corporation tax, and is very heavily taxed in some local- 
ities. In textile centers it sometimes forms a very large per- 
centage of the total valuation, as may be seen by looking at the 
assessments of personal property in such cities as Fall River and 

1 The operation of the tax upon the corporate excess of manufacturing and 
mercantile companies is so complicated that it cannot be adequately treated in this 
paper. I may refer to my article upon the taxation of corporations in Massachusetts, 
published in the Qiia7'terly Journal of Economics for February, 1907. The subject 
has been fully discussed in recent annual reports of the tax commissioner and in a 
special memorandum prepared for the legislative committee on taxation in May, 
1916 (H. Doc. 2133 of 1916). 



324 SELECTED READINGS IN PUBLIC FINANCE 

New Bedford/ In some cases it is supposed that manufacturers 
and assessors have working agreements under which machinery 
is assessed at a certain proportion of its actual value, and in other 
localities it is probable that machinery is taxed upon something 
less than a full valuation. But, upon the whole, it is reasonable 
to conclude that machinery is very heavily taxed in Massa- 
chusetts, and probably more heavily than in most other states. 

Intangible personalty found several avenues of escape. In the 
first place, it tended more and more to leave communities where 
tax rates were high, and to concentrate in a number of attractive 
residential towns where taxpayers could virtually fix their own 
assessments. Between 1871 and 1891 not less than $75,000,000 of 
personal estates assessed in Boston through the diligence of Mr. 
Hills were removed to fifteen favorite towns. In the former year 
these towns had assessed $26,750,000 of personal property; in 
the latter their personal assessments had advanced to $52,558,000, 
— an increase of $25,808,000. Even if we assume that during the 
interval there had been no increase of personal property except 
the $75,000,000 gained by the removal of certain taxpayers from 
Boston, it would appear that the local assessors had taxed but 
one-third of these estates. In 1882 one town received an estate 
assessed in Boston at $800,000, and in the following year in- 
creased its assessment of personal property by no more than 
$281,000, but was able nevertheless to reduce its tax rate from 
$11 to $7 per $1000.2 

In this connection it should be noticed that the method which 
the state followed in distributing among the cities and towns 
the revenue from the corporation and the bank taxes tended still 
further to give taxpayers the whip hand over the assessors. The 
general principle was to divide this revenue according to the 
residence of the stockholders f and this brought it about that 

1 Of a total valuation of ^106,69 1,000 in 1915? the personal property of Fall River 
accounted for ^42,707,000, or slightly over 40 per cent. In New Bedford, in the 
same year, out of a total valuation of ^111,346,000, personal property accounted 
for 141,845,000, or approximately 37 per cent. These percentages are to be com- 
pared with an average of about 25 per cent in the total assessment in the state. 
Fall River and New Bedford do not tax very large amounts of intangible personal 
property, so that it is probable that the greater part of the taxable personalty in 
those cities consists of machinery. 

2 See Report of the Commission on Taxation (1908), pp. 45-46. 

^ In 1898 the first departure from this principle was made when it was provided 
that the tax paid by street railroads should be distributed among cities and towns 



THE GENERAL PROPERTY TAX 325 

when a wealthy taxpayer changed his residence the town to 
which he removed received an increased share of the corporation 
and bank taxes. The result was that assessors knew that strict 
enforcement of the tax on intangible property would not only 
lead to the removal of such property to some other jurisdiction 
but would decrease the amount of corporation and bank taxes 
received from the state treasury. 

As years passed, the distribution of intangible property, and 
of the corporation and bank taxes, became m,ore and more favor- 
able to the wealthy towns. In 1865, before the process of con- 
centration had begun, the fourteen wealthiest towns had derived 
a revenue of $6.Sy per capita from local taxes on personal prop- 
erty and the corporation and bank taxes, v/hile in the rest of 
the state the revenue from these sources amounted to $5.81. 
Twenty years later these fourteen towns were receiving $14.28 
per capita, while the average for the rest of the state had fallen 
to $4.48. In 1905 the revenue of the fourteen towns had in- 
creased to $24.01 per capita, while that of the rest of the state 
amounted to $5-35, a trifle more than the figure for 1885 but 
materially less than the amount received in 1865. Somewhat 
similar conditions can doubtless be found in other states and 
countries, but it is probable that the student of taxation would 
have difficulty in finding elsewhere such extreme concentration 
of taxable resources as was gradually brought about in Massa- 
chusetts after 1865. The only possible result was the creation of 
inequalities by which the rates of taxation in the cities and in- 
dustrial towns were greatly increased, while they were lowered 
to almost nominal figures in a handful of wealthy communities.^ 

But overburdened taxpayers had still another method of es- 
cape; they could change their investments. Prior to 1862 this 
opportunity had not been open to them, since practically every 
form of investment was taxable. But when savings deposits were 
exempted from taxation, it was possible for people of means to 
make increased use of the savings banks. That this was done 
almost from the outset, there can be little doubt i^ and it is cer- 

where the tracks were located. Subsequently, the distribution of the tax on other 
corporations was modified in the interest of the industrial towns where such enter- 
prises were located. 

1 This subject was first carefully studied by the Tax Commission appointed in 
1896. See Report, pp. 63-68. 

^ See the Report of the Tax Commission appointed in 1874, pp. 61 ei seq. 



326 SELECTED READINGS IN PUBLIC FINANCE 

tain that no small part of the very large deposits of Massachusetts 
savings banks to-day are held by people of means. Another door 
was opened by the great increase of the federal debt during the 
Civil War, which supplied investors with upward of two billions 
of non-taxable securities. The establishment of the corporation 
tax in 1864 placed the stocks of Massachusetts corporations in 
the list of so-called non-taxables. At first this may not have 
affected the situation, but in time there was created an artificial 
demand for tax-exempt stocks which were bought in large 
quantities by trustees and some others who were not in a position 
to change their domicile and could not well avoid making returns 
of personal property. The exemption of mortgages in 1881 
created another class of untaxed investments, so that altogether 
a rather wide range of opportunities was open to persons ac- 
quainted with the provisions of the law. 

In many cases untaxed securities were bought for permanent 
investment, so that no evasion of the tax laws was either con- 
templated or practised. But it was now possible to* invest tem- 
porarily in non-taxables for the purpose of escaping assessment 
upon taxable securities. This could be done only a day or two 
before the date of assessment in any year, and there developed 
a regular spring demand for securities that could be held over 
assessment day and then returned to their former — perhaps one 
might say actual — owners. In other cases the practice was dif- 
ferent but the result the same. Comparatively few investors or- 
dinarily made returns of their personal property, and intangibles 
were usually taxed by "doomage." This meant that assessors 
would begin with a small assessment, and then, if the taxpayer 
did not make a declaration of his property, would subsequently 
increase it. In time the assessment might reach a figure that 
would compel the taxpayer to seek relief, and this could be had 
by shifting his investments from taxables to non-taxables until 
he could make a full return of his personal property under oath. 
Such a statement would probably satisfy the curiosity of the 
assessors for a number of years, so that after making it the 
taxpayer could at the first favorable opportunity sell his non- 
taxables and reinvest in taxable securities. There has probably 
been comparatively little downright lying in the taxation of per- 
sonal property in Massachusetts ; perjury is an ugly thing, and 
the law did not make it necessary. Intangible property never- 



THE GENERAL PROPERTY TAX 327 

theless managed to evade assessment, and could do so in many 
cases without change of the taxpayer's domicile. 

The next result was that personal property paid a constantly 
decreasing proportion of the local taxes. In 1907, out of a total 
local assessment of $3,512,000,000 in the state of Massachusetts, 
personal property accounted for no more than $766,600,000, or 
21.8 per cent; whereas in 1891 it had constituted 25.2 per cent of 
the total valuation, and in 1871 had constituted 33.8 per cent. 
At the end of this period it can be estimated that about half of 
the personal property actually taxed consisted of intangible 
personalty.^ 

In the distribution of the total burden of state and local taxa- 
tion some changes had occurred since 1874. In 1907 polls were 
assessed for $1,758,000 of taxes, or 2.4 per cent of the entire 
amount. The tax, however, was not so easy to collect as in 
former years, and the actual contribution made by polls was 
somewhat less than the percentage just stated. Since 1874 the 
liquor license tax had come into operation, and this, with some 
minor business taxes, amounted in 1907 to $3,453,000, or 4.7 per 
cent. The collateral inheritance tax introduced in 1891 now 
yielded $772,000, or about i per cent of the total. The corpo- 
ration taxes amounted to $9,761,000, or 13.-2 per cent. The taxes 
levied locally upon personal property stood at $12,386,000, or 
16,8 per cent; while those levied upon real estate amounted to 
$45,794,000, or 61.9 per cent. Comparison with the figures for 
1874 shows that polls were assessed in 1907 for substantially the 
same proportion as in 1874, that personal property and cor- 
porations accounted for 30 per cent of the total against 39 per 
cent in the former year, and that real estate paid 61.9 per cent 
of the total taxes against 58.4 per cent at the beginning of the 
period. The net result was that the proportion of the taxes paid 
by personal property and corporations had decreased by some 
9 per cent, and that this had been made up by business and 
inheritance taxes, which now contributed 5.7 per cent, and by 
an increase in the real-estate taxes of something more than 
3 per cent. 

A new chapter in the history of taxation in Massachusetts 
opened in 1908. In the previous year the inheritance tax was 

1 See Report of Commission on Taxation (1908), pp. 40 and (i"]. Compare also 
the data found on pp. 50-51 of the Report of the Commission of 1896. 



328 SELECTED READINGS IN PUBLIC FINANCE 

extended to direct inheritances, and this brought the whole prop- 
erty of inhabitants of the state under review by the tax com- 
missioner's department. Up to that time the local assessors had 
not infrequently gained information from probate returns. But 
since no tax was imposed upon direct inheritances, it was often 
possible for executors to avoid disclosing the amounts of pro- 
bated estates, a request from all the heirs that no inventory be 
filed being sufficient to accomplish this end. With a direct- 
inheritance tax in operation it was no longer possible to avoid 
filing inventories, and this fact alone would have altered mate- 
rially taxation conditions in the commonwealth. 

Another law enacted in 1908 hastened the inevitable crisis. 
The tax commissioner, in 1898, had been given certain super- 
visory powers over the local assessors,^ and thus the first step 
had been taken toward the establishment of central control over 
the assessment of property. The commissioner, however, was 
given but a single assistant to carry on the work of supervision, 
and there was no direct-inheritance tax which enforced the filing 
of inventories of all estates ; so that prior to 1908 his supervisory 
power had not been effective enough to alter materially the 
situation. But in that year a law was enacted^ by which the 
powers of the tax commissioner were extended, and he was 
authorized to appoint three supervisors of assessors to assist 
him in the performance of his new duties. 

The act stopped short of authorizing him directly or through 
the supervisors to revise local assessments, and merely au- 
thorized him to direct the local authorities to assess property in 
the manner prescribed by law. In case local assessors failed to 
comply with such directions, the commissioner could merely 
notify the mayor of the city, or the selectmen of the town, of 
such failure, a provision which becomes almost humorous when 
one recalls that in many of the towns the selectmen are also the 
assessors. The tax commissioner was indeed authorized to cause 
an assessor guilty of any violation of law for which a penalty 
was imposed to be prosecuted in the county courts, but for 
various reasons this did not meet the needs of the case. It there- 
fore happened that in some instances the local officials refused 
to obey the directions of the commissioner ; but in a majority of 
1 Ch. 507 of 1898. 2 ch. 550 of 1908. 



THE GENERAL PROPERTY TAX 329 

cases his recommendations met with substantial compliance, so 
that the Act of 1908 proved fairly effective. It at least created 
machinery by which information coming to the probate courts 
under the operation of the direct-inheritance tax was systemati- 
cally gathered by the supervisors of assessors and transmitted to 
the taxing authorities of the cities and towns. After 1907, there- 
fore, the local taxing authorities were continually supplied with 
more information about taxable personalty than they had ever 
possessed before, and in some cases more than they desired to 
possess. Up to this time the general property tax had been 
undergoing a gradual process of disintegration ; it might have 
lasted many years longer if no provision had been made for 
stricter enforcement. But the law of 1908 rapidly produced con- 
ditions under which a fundamental change in the system soon 
became inevitable. 

Another factor that contributed to the same result was the 
growth of private agencies for collecting and distributing in- 
formation concerning the ownership of corporation stocks. 
Foreign corporations doing business in Massachusetts were re- 
quired to file lists of their stockholders with the secretary of 
state, and these lists supplied a mine of interesting information. 
Others could sometimes be reached by examining lists filed in 
other states, or by purchasing a share of stock and then de- 
manding the right to examine stock books. In recent years, 
therefore, Massachusetts assessors have been able to procure, if 
they desire it, a large amount of information concerning taxable 
corporation stocks ; and the result has been a fuller assessment 
of such property than was formerly possible. 

There naturally followed a substantial increase in local assess- 
ments of personal property. From $766,600,000 in 1907 the 
figures advanced to $930,817,000 in 1910, to $1,033,000,000 in 
1912, and to $1,195,100,000 in 191 5. During the entire period of 
eight years the total increase was $428,500,000, which was prac- 
tically equal to the total increase in local assessments of personal 
property between 1861 and 1907. The table on the following 
page shows the facts for significant years. 

It will be seen that, after declining for fifty-seven years, the 
proportion of personal property in the total valuations increased 
from 21.8 per cent in 1907 to 25.1 per cent in 191 5. This was a 
substantial achievement for the supervisors of assessors, but its 



330 SELECTED READINGS IN PUBLIC FINANCE 

STATISTICS OF TOTAL AND PERSONAL PROPERTY ASSESSMENTS 
IN MASSACHUSETTS 



Year 


Total Valuation 


Valuation of 
Personal Property 


Percentage of 
Personal Property 


1850 


$551,106,000 


$201,977,000 


36.0 


1861 


861,500,000 


309,400,000 


35-9 


1874 


1,831,600,000 


542,300,000 


29.6 


1881 


1,642,200,000 


498,300,000 


30.2 


1907 


3,512,600,000 


766,600,020 


21.8 


1915 


4,769,900,000 


1,195,100,000 


25.1 



effect was not what was anticipated. In the first place, the prop- 
erty thus Hsted tended to disappear from the tax rolls in a com- 
paratively short time through changes in investments or domicile. 
Prior to 1908 domiciliary changes had been mostly within the 
state, and the tax laws had probably driven little property out of 
Massachusetts, although they had doubtless prevented a certain 
amount from coming here. But after that year removals be- 
came increasingly frequent, and presently threatened serious in- 
jury to the commonwealth. Precise data on the subject are, of 
course, very difficult to obtain; but by 1914 it was estimated, and 
generally believed, that the property removed from Massachusetts 
in that year was not less than $100,000,000. Whatever the exact 
amount may have been, it was now large enough to attract pub- 
lic attention and to affect materially the attitude of lawyers and 
bankers who were in a position to know what was going on. 

The second natural result was to increase greatly the demand 
for non-taxable investments ; and, inevitably, a greater demand 
began to create a greater supply. The manufacture of non-taxable 
preferred stocks of Massachusetts corporations became a regular 
industry; and, as was natural under the circumstances, some of 
the new securities proved to be of doubtful solidity. In 1907 the 
number of new corporations organized under the business cor- 
poration law was 1234, having a total capital of $63,372,000. By 
1912 the number of such corporations was 1453, having a capital 
of $213,466,000. Thereafter there was somewhat less activity 
among promoters, but both the number of companies and the 
total capital remained much larger than had ever been known. 
In 1913, 1914, and 191 5 the business corporations organized were, 



THE GENERAL PROPERTY TAX 331 

respectively, 1504, 1604, and 1700; while the figures of the total 
capital were, respectively, $172,103,000, $123,211,000, and $113,- 
509,000. Unfavorable business conditions may have been partly 
responsible for the decrease that followed 1912, but another prob- 
able cause was a growing distrust of the new securities. 

A third result was to stimulate greatly migration to the 
favored residential towns. Whenever the assessors in the or- 
dinary city or town, acting upon the information furnished by 
the supervisors, increased materially the assessment of personal 
property, some favored town immediately acquired new inhabit- 
ants. The average rate of taxation in the state was gradually 
increasing from about $17 per $1000, the figure for 1907, to $18, 
and finally $19. But in the wealthy residential towns tax rates 
were often less than $10 per $1000, and valuations were low. 
Such conditions could not be permanent. 

* Som_e of the developments in particular localities during this 
period deserve to be mentioned. The town of Norwood in 1908 
had a tax rate of $26.50, and at that juncture the assessors re- 
ceived information concerning $2,000,000 of taxable estates, 
which amounted to more than one and one-half times the existing 
assessment upon personal property. If matters had taken the 
usual course, these estates would have been taxed for a sum. that 
would have absorbed fully half of the income, and would pres- 
ently have been removed from the town. But under exceptionally 
fortunate and able leadership Norwood decided to try to assess 
all property at its full value, and thereby reduce the rate of 
taxation to a tolerable figure which would not drive any citizen 
away. Accordingly, in 1909 the valuation of real estate was 
increased from $4,739,000 to $7,680,000, while that of personalty 
was raised from $1,361,000 to $6,118,000. This resulted in an 
increase of over 125 per cent in the total valuation and, together 
with a reduction in the tax levy, reduced the rate of taxation to 
$8.50. For the moment the crisis was averted. But the tax rate 
was still higher than intangible property could bear permanently ; 
and in subsequent years the assessment of personal property 
gradually declined, while, despite further increases in the valua- 
tion of realty, the tax rate began to increase. . In 191 5 the assess- 
ment upon personalty was half a million less than in 1909, while 
the tax rate had increased to $12.80. Norwood had shown that 
exceptional conditions might enable an industrial town to enforce 



332 SELECTED READINGS IN PUBLIC FINANCE 

the tax laws without inviting immediate disaster ; but its subse- 
quent experience demonstrates that not even such conditions will 
avail in the long run. 

Stimulated by the example of Norwood or urged by the super- 
visors of assessors, a few other localities sought to enforce 
strictly the existing tax laws, but with very different results. 
The city of Maiden in 1909 increased the assessment of personalty 
from $6,734,000 to $12,751,000, and reduced its tax rate from 
$19.20 to $15.70; but by 1912 the assessment of personalty had 
declined to $8,438,000, and the tax rate had returned to the figure 
for 1908. Meanwhile, a number of wealthy residents had changed 
their domicile, and the city had lost a substantial amount of 
revenue from corporation taxes. Between 1909 and 191 1 the city 
of Quincy increased the assessment of personalty from $5,- 
813,000 to $7,830,000, and reduced its tax from $20.40 to $19.50. 
But two years later the personal assessment had sunk to $6,-* 
254,000, while the tax rate had advanced to $23.70. Salem tried 
the same experiment between 1909 and 1912, increasing its per- 
sonal assessment from $9,821,000 to $10,617,000, and reducing its 
tax rate from $18.60 to $18. But in 191 3 nearly a million of 
personal property disappeared from the tax roll, and the tax rate 
advanced to $20.50. Such examples were sufficient to deter other 
localities from attempting to emulate the example of Norwood. 

The other side of the picture may be seen by turning to some 
of the small residential towns. In 1908 Dover had assessed 
$470,000 of personal property and $931,000 of realty, and had a 
tax rate of $9.80. In the following year the assessment of per- 
sonal property jumped to $4,296,000, and the tax rate fell to $4.30. 
This suddenly acquired wealth was thereafter retained, and, in 
fact, increased to $6,925,000 in 1914, in which year the tax rate 
was $5.50. The town of Rowley in 1912 assessed $170,000 of 
personal property, and had a tax rate of $13. But in the next 
year the assessment of personalty rose to $2,088,000, and the tax 
rate decreased to $5.50. Though subsequently changes occurred, 
Rowley continued to tax a large amount of personalty, and 
remained in affluent circumstances. 

The most striking case was that of the town of Orleans, which 
in 19TO had taxed $181,000 of personal property at a rate of $15 
per $1000. The next year the assessment of this class of prop- 
erty increased to $968,000, and the tax rate fell to $3. With its 



THE GENERAL PROPERTY TAX 333 

reputation thus established, the town continued to increase its 
taxable wealth until in 1915 the valuation of personalty amounted 
to $3,941,000, and the tax rate was prevented from reaching the 
vanishing point only by liberal outlays for improvements. In 
this case corporation and bank taxes were an especially important 
factor in the situation. In 1910 Orleans had raised $10,259 from 
taxes upon property, and had received only $1085 from the state 
treasury on account of corporation and bank taxes. In 191 1 the 
levy upon property declined to $4557, while the revenue from 
corporation and bank taxes increased to $10,302. In 1914 the 
taxes upon property had increased to $11,509, as a result of the 
inflow of personal estates, while the revenue drawn from the 
state treasury had risen to $24,883. In that year Orleans enjoyed 
a revenue of $37,108 from all sources, including polls, whereas 
in 1910 it had an income of $11,982. 

In 191 5 Orleans showed a tax rate of $3 per $1000, the lowest 
in the state, and seven other towns had tax rates that were less 
than $10; fifty-two towns showed rates ranging from $10 to 
$14.80; nine cities and one hundred forty-seven towns showed 
rates ranging from $15 to $19.90; while twenty-six cities and 
one hundred and eleven towns had rates that ranged from $20 
to $30. These inequalities persisted in spite of certain changes in 
the distribution of the corporation taxes, by which the revenue 
from mercantile and manufacturing corporations was allotted to 
the localities where the plants were situated and business carried 
on. Further changes in the distribution of the corporation and 
bank taxes might improve somewhat the position of the cities 
and the ordinary agricultural or manufacturing towns, but the 
distribution of taxable personal property had become so unequal 
as to make the situation worse than it had been prior to the 
introduction of the direct-inheritance tax and the enactment of 
the law creating supervisors of assessors. In 1905 the fourteen 
towns previously mentioned had received $24.01 of revenue per 
capita from corporation taxes and the local tax on personal prop- 
erty; while in the rest of the state the revenue was but $5.35 
per capita. In 191 5 the figures were, respectively, $29.50 and 
$7.54.^ Nothing but a radical change in the laws relating to 
taxation held out any prospect of relief. 

1 It is worth while to notice the changes that occurred over the whole period from 
1865 to 1 91 5. In the former year fourteen favored towns derived 2l per capita revenue 



334 SELECTED READINGS IN PUBLIC EINANCE 

From 1907 to 191 5 only slight changes occurred in the distri- 
bution of the total burden of taxation. Of the total of $112,- 
280,000/ polls were assessed for $2,055,000, or 1.8 per cent, which 
is to be compared with 2.4 per cent for 1907. Liquor licenses and 
minor business taxes contributed $3,678,000, or 3.3 per cent, 
which is 1.4 per cent less than in the earlier year. Corporations 
paid $12,484,000, or ii.i per cent, as against a percentage of 13.2 
eight years earlier. The inheritance tax yielded $3,104,000, or 
2.8 per cent of the total, which is an increase of i.S per cent over 
1907. The taxes assessed upon personal property stood at $22,- 
180,000,^ which was 19.8 per cent of the total, the proportion of 
personalty being 3 per cent greater than at the beginning of this 
period. Finally, real-estate taxes contributed $68,776,000, or 
61.2 per cent, which was 0.7 per cent less than in 1907. 

As was to be expected, the introduction of a tax upon direct 
inheritances led to renewed efforts to secure a better method of 
taxing personal property. In response to a petition from leading 
business interests, and upon the recommendation of the governor, 
another tax commission was authorized in 1907. In the following 
year this commission recommended^ changes in the distribution 
of the corporate franchise tax, the exemption of future issues of 
county and municipal bonds, the appointment of supervisors of 
assessors, and the introduction of a flat tax upon intangible 
property — the so-called "three-mill tax." 

The first proposal was promptly carried into effect by a law 
which provided that thereafter the taxes paid by manufacturing 
and mercantile corporations and distributed among the several 
cities and towns should be divided equally between the localities 
where the stockholders resided and those in which the business 
was carried on.* Since previously the whole amount not re- 
tained by the state had been allocated to the towns where the 
stockholders were domiciled, this act tended to mitigate some- 
what the growing inequality between the wealthy residential 

of ^6.87 from the stated sources, and the rest of the commonwealth ^5.81. In 191 5 
the figures were, respectively, ^29.50 and $7.54. Thus the fourteen towns had gained 
$22.6t„ while the rest of the state had gained ^1.73. 

1 From this total automobile licenses are excluded. 

2 In this item is included ^76,644 of revenue paid into the state treasury under 
the operation of the bond-registration tax. 

3 Report of the Commission on Taxation appointed und3r the provisions of 
ch. 129 of the resolves of 1907 (Boston, 1908). * Ch. 614 of 1008. 



THE GENERAL PROPERTY TAX 335 

towns and the rest of the state. Subsequent acts^ turned over 
to the towns where business was carried on the whole of the 
revenue from ordinary business corporations except that part, 
representing the proportion paid in respect of stock owned by 
non-residents, which was retained by the commonwealth. The 
result was that between 1905 and 191 5 the whole amount of 
revenue received from corporation taxes by the fourteen favored 
towns previously referred to decreased from S 10.36 per capita 
to $6.20, whereas in the rest of the state it increased from I1.62 
to $1.93. In 1916 a final act^ provided that the taxes paid by all 
remaining classes of corporations, except that part representing 
non-resident stock, should be allocated to the cities and towns 
where the business is carried on. This leaves only the revenue 
from the bank tax subject to the old rule of distribution according 
to the domicile of the stockholders. 

The second recommendation of .the commission also was ac- 
cepted. In 1905 the state treasurer had urged that future issues 
of bonds of the commonwealth should be exempt from taxation. 
He showed that of $84,580,000 of registered bonds then outstand- 
ing 70 per cent were held outside the state, 24 per cent were held 
by corporations and institutions within the state but exempt from 
taxation thereon, and only 6 per cent were in the hands of in- 
dividual inhabitants subject to local taxation.^ The legislature, 
accordingly, passed an act exempting future issues of state 
bonds,* under which it was estimated that the state gained one 
quarter of i per cent in the interest rate upon the next issue.^ 
The cities and towns now came forward with the request that 
their securities also should be made tax exempt, and the legis- 
lature exempted from taxation future issues of county and 
municipal bonds.^ 

This step was stoutly opposed by most of the remaining 
advocates of the general property tax. But the practical situation 
confronting the cities and towns called loudly for a change. No 
investor would purchase a bond yielding 4 per cent interest with 
the expectation of paying a tax amounting to i^ or 2 per cent, 
and accordingly city and town treasurers withheld from the 
assessors information concerning the ownership of municipal 

1 Chs. 456 of 1910 and 198 of 1914. * Ch. 493 of 1906. 

2 Ch. 299 of 1916. ^ Treasurer's Report, 1906, pp. 8-9. 

3 Treasurer's Report, 1905, pp. 6-7. ^ Chs. 464 and 594 of 1908. 



336 SELECTED READINGS IN PUBLIC FINANCE 

bonds. In some cases, indeed, they made it their policy to inform 
investors that this was their practice. Little or no revenue was 
actually derived from the tax upon municipal bonds, while the 
fact that such bonds were legally taxable tended to limit some- 
what the demand and so to increase the rate of interest. Neither 
the state nor the towns could expect a reduction of interest 
equivalent to the average rate of taxation, since so many of the 
bonds were held by corporations and exempted institutions and 
so few of the remainder were ever taxed, but it is probable that 
the broader market opened to public securities in consequence 
of exemption resulted in an immediate reduction of about one 
quarter of i per cent in the interest basis. 

In time the exemption of municipal securities opened the door 
to serious abuse. The city and town officials soon learned that 
there was a regular demand for tax-exempt securities just before 
the first day of April in each year, and began to accommodate 
their offerings to this situation. In January, February, and 
March increasing quantities of short-term notes maturing after 
April I began to come into the market, which commanded very 
low rates of interest. In 191 1 the total amount of short-term 
notes issued by the towns was $9,700,000, while by 191 5 it had 
risen to $15,363,000, an increase of approximately 60 per cent. 
But the striking fact was that the notes issued in January, 
February, and March, which were those utilized over the first 
day of April, increased from $2,580,000 to $5,180,000, or more 
than 100 per cent; while the amount of notes issued in April, 
May, and June, which could not be so utilized, remained prac- 
tically stationary, the increase being less than 10 per cent. Com- 
plete data for the cities are not available, but the issues of notes 
recorded in the leading financial papers show the same conditions 
that developed in the towns. In 191 1 these papers reported the 
issue of $4,667,000 of city notes during the months of January, 
F^ebruary, and March, while in 1916 they reported a total of 
$9,870,000, an increase of over no per cent. The March issues, 
which were especially sought around tax day, rose from $1,- 
460,000 in 191 1 to $5,590,000 in 1916, an increase of nearly 300 
per cent. Interest rates upon these issues were very low, some- 
times falling below 2 per cent, and in some cases reaching such 
figures as 1.3 per cent, or even one quarter of i per cent; while 
one city actually received a small premium for accommodating 



THE GENERAL PROPERTY TAX 337 

an investor with $100,000 of notes maturing just around tax day. 
Thus an exemption intended to apply to permanent investments 
in municipal securities came to be a means of facilitating tem- 
porary changes in investments with a view to evading taxation. 

The third recommendation of the commission resulted in the 
enactment of the law, already discussed, by which three super- 
visors of assessors Avere appointed and provision was made for 
distributing among the local boards information about property 
uncovered in the probate courts. This proposal originated in 
connection with the plan for a flat tax on intangible property, 
but was presented separately by the commission with the sug- 
gestion that the establishment of a three-mill tax upon intangible 
property 'Svill remove all reasonable ground of objection to the 
proposal for state supervision of the assessment of property." 
Since it has been supposed by not a few people that the super- 
visor law was proposed with the .deliberate intention of forcing 
a crisis in taxation affairs, it is important to recall the fact that 
it originated in connection with a plan for establishing a fair and 
practicable method of taxing intangible property. 

The fourth recommendation was that intangible property 
should be exempted from other taxation, and should then be 
taxed at the uniform rate of three mills upon each dollar of the 
fair cash value, or $3 per $1000. Since such a tax would be levied 
at the same rate in every city and town, taxpayers would have 
no inducement to change their domicile ; and since it would sub- 
stitute a reasonable for a confiscatory exaction, it could be 
strictly enforced without driving people out of the state. It was 
based upon a plan which had been tried in Pennsylvania and 
Maryland with no little success, and was subsequently adopted 
by Minnesota, Iowa, Rhode Island, and North Dakota. The 
commission realized, however, that it was open to objection upon 
constitutional grounds, and therefore recommended that the legis- 
lature secure the opinion of the Supreme Court concerning its 
constitutionality. In case the opinion of the court should be 
adverse, the commission pointed out that the constitution of the 
commonwealth ought to be amended. 

In due course the legislature submitted the question to the 
Supreme Court, which pronounced the three-mill tax unconsti- 
tutional.^ Thereupon, an amendment was proposed striking out 

1 195 Mass., 607. 



338 SELECTED READINGS IN PUBLIC FINANCE 

of the constitution the requirement that taxes must be propor- 
tional, but this failed to secure the two-thirds vote required in the 
House of Representatives. The following year a similar amend- 
ment passed the legislature, but with a provision that it should be 
referred to a special commission for further investigation. This 
commission submitted to the next legislature an adverse report,^ 
which in 1910 resulted in the defeat of the proposed amendment, 
so that the project of a three-mill tax had to be abandoned. 

Opposition to the proposed constitutional amendment was 
based upon a number of grounds. In the first place, Mr. Hills, 
Mr. Henry Winn, and most of the local assessors opposed it 
because they still desired to have all property taxed at the same 
rate. Many of them would have favored the taxation of personal 
property at the average rate prevailing throughout the common- 
wealth, but they were unwilling to make any further concessions. 
A second group of remonstrants would have favored the estab- 
lishment of a uniform tax upon intangible property at some such 
rate as $10 or $12 per $1000, but contended that a rate of $3 was 
altogether too low and w^ould tend to increase the burden upon 
other classes of property. A third ground for objection was the 
belief that a reduction of the tax upon bonds and upon stocks of 
foreign corporations would affect adversely the value of non- 
taxable securities. And, finally, a fourth reason for opposition 
was the fear that the removal of the requirement that taxes must 
be proportional would open the door to favoritism and to radical 
legislation. 

Taxation conditions in Massachusetts were then so bad that 
it is probable that the opposition of the first two classes of re- 
monstrants would not have availed to defeat the amendment. 
But the arguments advanced by the other objectors raised a 
number of new questions which seemed to many people to require 
further time for consideration, and divided the forces which 
otherwise might have favored a better method of taxing in- 
tangible property. 

In 191 1 Governor Foss directed the attention of the legislature 
to the subject of taxation,^ and recommended the establishment 

1 Report of the Commission Appointed to Investigate the Laws Relating to 
Taxation (December, 1909). 

2 See H. Doc. 1900 of 191 1. Also Sen. Docs., 255 of 1912 and 39 of 1913. 



THE GENERAL PROPERTY TAX 339 

of a state income tax and the adoption of a better method of 
taxing wild and forest lands. Prior to 1910 it would probably 
have been useless to propose in Massachusetts such a #neasure 
as a state tax upon incomes, since here, as elsewhere, the people 
had long been accustomed to the taxation of property and were 
inclined to regard an income tax as inquisitorial. But the situa- 
tion suddenly changed when Congress submitted to the states 
the sixteenth amendment to the federal constitution. This 
brought up for consideration the whole question of income taxa- 
tion, and required every one in active political life to define his 
attitude upon it. Those who advocated immediate ratification of 
the amendment could not urge that a state income tax would be 
inquisitorial ; while those who opposed such ratification usually 
did so upon the ground that the income tax should be reserved 
for the states, and were not in a position to argue that Massa- 
chusetts ought not to employ it. Governor Foss's proposals, 
therefore, met with very general support; his amendment au- 
thorizing a special forest tax was immediately adopted, and 
nothing but dift'erences of opinion concerning the proper form of 
an income-tax amendment prevented acceptance of his other 
recommendation. 

These differences, however, proved difficult to harmonize; the 
more so because they offered a convenient reason for opposition 
to any change in the method of taxing intangible property. They 
turned chiefly upon the questions, whether the amendment should 
authorize a progressive income tax, and whether it should pro- 
vide that property taxed upon its income should be exempted by 
constitutional requirement from other taxation. In 1912 and 
1913, as in 191 1, controversy over these points was chiefly re- 
sponsible for the defeat of proposed income-tax amendments. 

But while such controversy continued, conditions were becom- 
ing increasingly serious. Orleans had a $3 tax rate, other fa- 
vored towns were receiving large accessions of taxable personalty 
every spring, and it was becoming evident to the people of the 
rest of the state that they could not hope to retain even their 
existing revenue from intangible property. Moreover, removals 
of large amounts of personalty to neighboring states were be- 
coming increasingly common, and were causing well-founded 
alarm. These conditions finally led the mayor and the assessors 
of Boston to favor the income-tax project, and elsewhere tended 



340 SELECTED READINGS IN PUBLIC FINANCE 

to disintegrate the opposition of local assessors. Moreover, the tax 
commissioner had become convinced of the necessity of reform, 
and the annual reports of his department were dealing vigorously 
with the subject in a manner which could not fail to impress both 
the legislature and the public. Finally, Wisconsin in 1912 intro- 
duced a state income tax which proved an immediate success 
and furnished an impressive object lesson to Massachusetts. 

In 1911, at the suggestion of Governor Foss, the tax com- 
missioner instituted an investigation of the data furnished by the 
inheritance-tax returns, and found that in estates passing through 
the probate courts the personal property amounted to between 
three and four times as much as the realty. From September i, 
1907, to August 31, 1908, the returns of all estates, whether 
taxable or not, showed that the real property brought under 
review was valued at $22,462,000 and the personalty at $70,715,- 
000. From September i, 1908, to December i, 191 1, the returns 
showed real property amounting to $97,734,000 and personal 
property valued at $368,741,000. Upon the assumption that the 
total personalty of the inhabitants of Massachusetts was more 
than three times the total realty, and that at least one-half of 
the personalty was taxable under existing law, the tax commis- 
sioner estimated that there must be from $4,000,000 to $5,000,- 
000 of taxable personal property within the commonwealth, 
whereas the local assessors in that year had assessed but $984,- 
300,000.^ Up to that time it had been possible to argue that, 
although much intangible property evaded taxation, the assessors 
were able to secure the greater part of it. But thereafter it was 
usually accepted as a fact that the untaxed personalty, chiefly 
intangibles, was three and perhaps four times as great as the 
amount actually taxed. This tended to give a somewhat new turn 
to discussions of the tax problem. 

In 1914 the need for a change in the method of taxing in- 
tangible property became so apparent that, without waiting for 
a constitutional amendment, the legislature established a registra- 
tion tax upon certain classes of bonds.^ It provided that holders 
of bonds secured by mortgage upon tangible property actually 
taxed in Massachusetts or elsewhere might register such bonds 
with the tax commissioner and pay a registration tax of three 
mills on the dollar. Bonds so registered were to become exempt 
1 See Sen. Doc. 255 of 191 2, pp. 2-3. ^ ch. 761 of 1914. 



THE GENERAL PROPERTY TAX 341 

from other taxation. As a property tax, of course, this measure 
would have been wholly invalid, but the legislature acted upon 
the theory that it might be upheld as a valid excise. Doubts 
about the constitutionality of the measure were sufficient to 
prevent most investors from taking advantage of the act, but 
substantial amounts of bonds were registered with the tax com- 
missioner up to the repeal of the law by the Income Tax Act 
of 1916. 

Agitation for a better method of taxing intangible property 
was becoming increasingly active and influential. In 1908 a 
committee of prominent citizens was organized to advocate the 
adoption of the three-mill tax, and the following year the Boston 
Chamber of Commerce took up the subject in vigorous fashion. 
In 1910 a state-wide organization known as the Merchants' and 
Manufacturers' Committee on the Tax Laws came into the field, 
so that the movement was no longer confined to Boston and its 
immediate vicinity. In 1914 the Massachusetts Tax Association 
was organized, with Lucius Tuttle as its first president and a 
board of directors representing many of the important business 
interests of the commonwealth as well as organized labor. Upon 
Mr. Tuttle's death, Ex-Governor Curtis Guild succeeded to the 
presidency, and an active campaign was instituted under most 
favorable auspices. With the cooperation of Governor Walsh 
and the tax commissioner's department, a constitutional amend- 
ment permitting the levy of a proportional income tax, but not 
requiring that property taxed upon its income must be exempted 
from other taxation, was drafted and submitted to the legislature, 
which ratified it by decisive votes in both branches. This 
amendment passed the legislature of 191 5 even more decisively, 
and in the following November was adopted at the polls by an 
overwhelming vote. The way was now open for a reform of 
the tax on personal property. 

The legislature of 191 5, anticipating the ratification of the 
amendment, authorized the appointment of a special commission 
on taxation which was instructed to investigate the advisability 
of changes in existing tax laws and to draft an income-tax act. 
In January, 1916, this commission^ submitted the draft of a 
well-considered act which, under the impetus of the overwhelm- 
1 Report of the Special Commission on Taxation (1916). 



342 SELECTED READINGS IN PUBLIC FINANCE 

ing ratification of the income-tax amendment at the polls, was 
enacted after much discussion but with little effective opposition. 

The income-tax law of 191 5 was designed primarily to pro- 
vide a better method of taxing intangible property. It therefore 
exempts such property from local taxation, and imposes upon 
its income a tax of 6 per cent, from which, however, $300 of 
taxable income is exempt for persons whose total income from 
all sources does not exceed $600. But for the tax levied since 
1646 upon personal, trade, and professional incomes, the law of 
1916 might have been confined to the income from intangible 
property. Since, however, that tax was in existence and was not 
likely to be repealed, it was necessary for the new act to take 
cognizance of this fact. It would have been clearly undesirable 
to have two income taxes : one levied by the state and strictly 
enforced ; the other levied by local assessors and almost a dead 
letter. The obvious and expedient solution was the transfer of 
the old local tax to the commonwealth, and therefore the law of 
1916 includes a tax upon income from personal, trade, and profes- 
sional earnings. Finally, the act imposes a tax of 3 per cent upon 
profits derived from dealings in intangible personal property. 

The new law, therefore, is much narrower in scope than the 
federal income tax, which applies to income from all sources, 
and somewhat narrower than the Wisconsin income tax, 
which reaches practically all incomes except dividends from 
certain classes of corporations. It follows, however, what was 
undoubtedly the line of least resistance for Massachusetts. There 
was no popular demand for a new method of taxing real estate 
and tangible personal property, and the problem before the 
legislature was that of finding a better method of taxing in- 
tangible personalty. The result is a perfectly logical adjustment 
by which personal, professional, and trade incomes and income 
from intangible property are taxed by the state; while tangible 
property continues to be subject to local taxation upon its 
capital value. 

Following antecedent practice, the Massachusetts income tax 
is imposed upon "inhabitants'* of the commonwealth. It is, 
therefore, a personal tax payable by people who are inhabitants 
of the commonwealth at any time between the first day of 
January and the thirtieth day of June in any year. Persons who 
are not inhabitants within the meaning of that word as defined 



THE GENERAL PROPERTY TAX 343 

by the Supreme Court are not subject to the tax, even though 
they may carry on business in Massachusetts ; and, upon the 
other hand, inhabitants of Massachusetts are taxable upon income 
derived from business carried on outside of the commonwealth. 
The working of this feature of the law will be watched with 
interest. 

The tax upon the income from intangible property substitutes 
a reasonable and uniform tax for one levied at rates that ranged 
from $3 to $30 per $1000. Under the old system many people 
evaded taxation, some compounded with the local assessors for 
a reasonable tax, and still others paid one-fourth or one-third 
of their incomes. The intention is that the new tax shall be 
enforced upon every one, and the act accordingly provides ade- 
quate methods of administration. 

The first thing, of course, is the requirement of sworn returns 
of income from taxable intangible property, which must be made 
on or before the first day of March in each year and relate to the 
income of the preceding calendar year. Failure to file such a 
return renders a taxable person liable to an additional tax of $5 
for every day he is in default. Continued failure after receipt of 
a notice from the tax commissioner makes a person liable to be 
assessed by the commissioner for twice the amount of his taxable 
income, and subjects him to a further penalty of fine, imprison- 
ment, or both. Conviction for refusal to make a return works the 
forfeiture of a person's right to hold public office within the 
commonwealth for such a period, not exceeding five years, as 
the court may determine. Similar penalties are provided for mak- 
ing fraudulent returns, the law making no distinction between 
persistent refusal to file a return and the filing of a return found 
to be fraudulent. Since the enforcement of the act is to be wholly 
in the hands of the state tax department, these penalties should 
prove adequate.^ No careful lawyer or responsible banker will 
advise a client or customer to trifle with the new lavv^ ; and there 
is every indication that the income tax, with its requirement of 
sworn returns, has been accepted by the business community, and 

1 The act, of course, makes suitable provision for preventing disclosure of the 
details of tax returns. It provides, however, that the names of the persons who 
have filed returns shall be open to public inspection. It permits taxpayers to file 
their returns either with the tax commissioner or with the income-tax assessor of 
the district in which they live. 



344 SELECTED READINGS IN PUBLIC FINANCE 

will be strictly complied with. It will not be people of wealth, 
but those of smaller means and little or no business experience, 
who w411 cause most difficulty. 

The tax upon the income of intangible personalty applies only 
to such property as was formerly subject to taxation; thus in- 
comes from mortgages upon taxable Massachusetts real estate, 
deposits in savings banks, tax-exempt state and municipal bonds, 
national bank stock, and the stock of Massachusetts corporations 
are all exempted. The same is true of income from so-called 
"stocks" of most of the voluntary associations which are so com- 
mon in Massachusetts. In general, owners of securities will find 
that they are taxable only upon income derived from sources that 
were taxable under the old law. About the only exception is 
found in the case of trusts or other voluntary associations not 
owning real estate exclusively, or shares in Massachusetts cor- 
porations, and not doing business principally in Massachusetts. 

A very important and interesting feature of the tax on the 
income from intangibles is that it provides for a deduction on 
account of indebtedness. The property tax had authorized such 
deduction only against certain credits ; that is, it allowed the 
taxpayer to deduct money he owed from debts due him. The 
new law does not indeed permit the deduction of interest paid 
upon any and all debts from the income received by the taxpayer 
from taxable intangible property. To do so would have been 
wrong in principle and would have opened the door to wholesale 
evasion. Deduction of all debts from taxable income is neces- 
sary as well as proper under a general income tax applicable to 
income from all sources, but under a partial income tax it is 
manifestly impossible. The new law, therefore, follows what may 
be called the principle of granting the taxpayer a proportional 
offset or deduction. It provides in effect that, from the income 
received from taxable intangible property, the taxpayer may de- 
duct such a proportion of the interest paid on his total indebted- 
ness as the income which he derives from taxable intangible 
property bears to his total income. 

The provisions of the law at this point are necessarily com- 
plicated, but their practical operation may be shown by the three 
following cases : a person receiving $99,000 of income from tax- 
able intangible property and $1000 of income from other sources 
may deduct from his taxable income derived from intangible 



THE GENERAL PROPERTY TAX 345 

property 99 per cent of the interest paid upon his indebtedness ; a 
person receiving $50,000 of income from taxable intangibles and 
$50,000 from other sources will be able to deduct one-half of the 
interest which he pays tepon his debts ; and, finally, a person re- 
ceiving $1000 from taxable intangible property and $99,000 from 
other sources will be permitted to deduct but i per cent of the 
interest upon his obligations. These cases do not take account 
of all the provisions of the law and are intended merely to illus- 
trate the principle which is eminently fair and in practice should 
offer no serious difficulties. 

Another departure from former practice is the provision which 
grants an exemption of $300 of income from intangible property 
to persons whose total income from all sources does not exceed 
$600 during the year in respect of which the tax is assessed. 
Under the old law a person owning taxable securities received 
no exemption, and in many cases where small estates were un- 
covered in the probate courts great hardship arose. There was, 
indeed, a provision that the assessors might exempt the polls and 
any portion of the estates of persons who by reason of age, in- 
firmity, or poverty were deemed to be unable to contribute toward 
the public charges. But this did not meet the needs of the case, 
since a person with a capital of $5000 or $10,000 was not in a 
position to plead "poverty." Thus it came about that persons 
deriving small incomes from taxable property were frequently 
taxed for 20 or 25 per cent of such incomes. The new law not 
only reduces the rate of taxation to 6 per cent of the income 
from intangibles, but provides an exemption of $300. 

The tax imposed upon income derived from annuities and from 
"professions, employments, trade, or business" will be levied at 
the uniform rate of i^ per cent. This is a trifle less than the 
average of the local tax rates to Avhich such incomes were subject 
under the old law. It is expected, however, that the assessments 
made by state authorities will be so much more complete that the 
revenue will be considerably greater than formerly. The new 
law continues the exemption of $2000 of professional, personal, 
or trade incomes, and provides the further exemption of $500 for 
a married person and '$250 for each child under the age of 
eighteen years, or for a parent dependent upon the taxpayer for 
support ; but provides that the total exemption shall in no case 
exceed $3000. Income from annuities received no exemptions 



346 SELECTED READINGS IN PUBLIC FINANCE 

under the old law, but under the new has an exemption of $300 
if the total income of the annuitant from all sources does not 
exceed $600. 

In its provisions concerning professiikns, employments, trade, 
or busmess, the new law is noteworthy because it carefully defines 
taxable income. The old law merely provided that the "income" 
from such sources should be taxed, and that income derived from 
property subject to taxation should not be taxed. The Supreme 
Court held, however, that this permitted the taxation of the entire 
income of a merchant even though his merchandise might be 
subject to local taxation,^ so that in fact double taxation of mer- 
chandise and the income derived therefrom was possible. The 
new law im.poses the tax upon the net income of a business, de- 
termined substantially as any good accountant would compute it ; 
and then provides that a taxpayer may deduct from such' net 
income a sum equal to 5 per cent of the assessed value of the 
tangible property, real and personal, owned by him and used in 
the business. 

The tax of 3 per cent imposed upon profits derived from deal- 
ings in intangible personal property is levied upon all inhabitants 
of the commonwealth whether or not they are engaged in the 
business of dealing in such property. It also applies to dealings 
in all classes of securities, taxable and non-taxable. The tax is 
to be levied upon the "excess of the gains over the losses," and 
is to be assessed annually. But the law provides that trustees or 
other fiduciaries shall be assessed at the time a trust is terminated 
unless it continues for more than five years, in which case the 
assessment shall be made at least in every fifth year. 

This provision of the act occasioned considerable discussion. 
Without it, gains from dealings in intangible property would have 
been taxable at the rate of i^ per cent if they formed part of 
the income of any business carried on by inhabitants of the com- 
monwealth ; but they would not have been taxable to individuals 
who speculated in securities. Now an income tax differs from a 
property tax in that it exempts from taxation property yielding 
no income, which, if it has any value, would be taxable under a 
property tax. It is obviously the intention of the new law that 
persons who speculate in non-dividend-yielding stocks shall be 
1 Wilcox V. Middlesex Coicnty Commissioners, loj Mass., 544. 



THE GENERAL PROPERTY TAX 347 

taxed upon their speculative gains, even though they may not be 
engaged in the business of buying or selHng intangible property. 
That the rate was placed at 3 per cent instead of i^ per cent 
was perhaps due in part to the desire to tax the "speculator"; 
but it is also explicable on the ground that intangible property 
is now exempt from taxation as property, so that persons who 
deal in it may fairly be required to pay a somewhat heavier rate 
than persons who deal in merchandise or other taxable tangible 
property. 

As already stated, the administration of the income tax is 
placed in the hands of the state tax commissioner. It was not 
to be expected that the tax would work well if administered in 
approximately three hundred and fifty different ways by ap- 
proximately three hundred and fifty local boards of assessors ; 
and Massachusetts acted wisely in turning the work over to the 
commonwealth. During the fifty years of its existence, the tax 
commissioner's department has been administered in a manner 
that has commanded general confidence, and all that needed to 
be done was to add to its equipment a new bureau charged with 
the assessment and collection of the income tax. 

The tax commissioner accordingly is authorized to appoint an 
income-tax deputy who will have general charge of the taxation 
of incomes. He is also to divide the state into districts, and to 
appoint an income-tax assessor for each district. Thus the ad- 
ministration will be in some measure locaHzed, but the number 
of districts will probably not exceed ten or twelve, and responsi- 
bility v/ill rest with a single ultimate authority, the state tax 
commissioner. Under this arrangement there will undoubtedly 
be intelligent and even-handed enforcement of the law in every 
city and town, so that taxpayers will have the assurance that 
all citizens are being treated alike. The tax commissioner is 
authorized to make necessary rules and regulations for the assess- 
ment and collection of the income tax, and will undoubtedly be 
given a generous allowance for necessary expenses. Upon the 
administrative side, therefore, the law of 1916 seems to make 
adequate provision for strict enforcement of the tax upon 
incomes. 

Information at the source is also required in certain cases. 
Every employer of labor must report to the tax commissioner the 



348 SELECTED READINGS IN PUBLIC FINANCE 

names and addresses of all regular employees who are inhabitants 
of Massachusetts, and have received wages, salaries, or other 
compensation in excess of $1800 during the previous calendar 
year. Also corporations doing business in the commonwealth 
and voluntary associations having transferable shares are, unless 
their stocks fall within the class of tax-exempt securities, re- 
quired to report the names of their shareholders. They are 
further required to report the names of all inhabitants of Massa- 
chusetts to whom they have paid annuities or interest upon their 
bonds, notes, or other evidences of indebtedness, except interest 
on coupon bonds and incomes exempt from taxation under the 
act. Neither of these requirements is unduly burdensome, so 
that no such difficulties will arise as have developed under 
the federal income tax. 

A final provision of interest is that concerning the taxation of 
personal property in the year 191 7 when the new law goes into 
effect. Since intangible property is hereafter to be exempt from 
local taxation, many taxpayers will be entitled to reductions of 
the local assessments upon their personalty ; but since tangible 
personal property to-day is frequently under-assessed, it is im- 
portant that such persons should not receive greater reductions 
than they are entitled to. The law, therefore, provides that in 
1917 no local assessment of personal estate shall be reduced below 
the amount assessed in 19 16, unless the taxpayer makes a return 
of his tangible personal property. This means that, in order to 
benefit by the exemption of intangible property or income for- 
merly subject to local taxation, taxpayers must file with their local 
assessors in 191 7 a return of their taxable personality. For the 
average citizen this would mean household furniture in excess of 
$1000, automobiles^ carriages, horses, and live stock; and for 
merchants and manufacturers it will mean a return of mer- 
chandise and machinery. In this manner there will be secured 
a much fuller assessment of tangible personalty than ever before ; 
so that the new law, by providing a just and practicable method 
of taxing intangibles, will remove many of the difiiculties that 
have hitherto attended taxation of tangible personalty. In this 
respect it is probable that the experience of Massachusetts will 
be the same as that of the few other states that have adopted fair 
and efficient methods of taxing intangible property. 



THE GENERAL PROPERTY TAX 349 

The new law is calculated to yield a revenue somewhat greater 
than is now derived from intangible property and taxable in- 
comes, and there can be little doubt that it will fulfill expecta- 
tions. It should be remembered, however, that Massachusetts 
has been taxing some $500,000,000 or $550,000,000 of intangible 
personahy, so that the results of the new act cannot be as spec- 
tacular as those secured in other states where intangible property 
had formerly contributed little or nothing. 

The intangible property taxed in 1914 probably paid somewhat 
less than the average rate of taxation because of its concentra- 
tion in Avealthy towns. If we estimate that it paid $16 per $1000, 
it yielded a revenue of $8,000,000 to $8,800,000. The amount of 
incomes now taxed is not known, but it probably does not exceed 
$20,000,000, and the taxes collected from this source cannot ex- 
ceed $350,000 or $400,000. The new income tax, therefore, must 
yield from $8,000,000 to $9,000,000 in order to offset the loss of 
revenue occasioned by the exemption of intangible property and 
income from local taxation. It ought to do so, since all the esti- 
mates show that there are in the state enough taxable intangibles, 
and professional, personal, or trade incomes, to give the desired 
result. This calculation assumes that the exemption of intan- 
gibles and income from local taxation will decrease local assess- 
ments of personal property by some $550,000,000. But this will 
not be the case, because of the provision that such assessments 
shall not be less in 1917 than in 1916 unless taxpayers bring in 
returns of their taxable property. The law, therefore, is certain 
to produce a larger revenue from tangible personal property, an 
important factor of safety in calculations of the probable result 
of the new income tax. 

Greatly in favor of the new act is the fact that it was adopted 
only after some years of serious discussion which familiarized the 
people of the commonwealth with the evils of the existing system 
and the need of having reasonable and enforcible tax laws. It 
represents a fairly general consensus of opinion reached after 
thorough consideration, and therefore promises to solve the most 
vexatious of taxation problems. This has been the experience 
of other states that have introduced reasonable methods of tax- 
ing intangible property, and there is little ground for doubt about 
the result in Massachusetts. 



350 SELECTED READINGS IN PUBLIC FINANCE 

47. The General Property Tax in Switzerland:^ by Charles J. 
Bullock. — With the foregoing accounts of the working of the 
general property tax in the United States it is useful to compare 
the following account of the position and operation of this tax 
in Switzerland: 

For an American the property taxes of the Swiss cantons 
have peculiar interest. Switzerland is the only country of Europe 
in which direct taxes upon property hold such a position in the 
fiscal system as they occupy in the United States. It has a fed- 
eral form of government, and therefore, like the United States, 
must adjust federal finances to state and local, while readjusting 
the latter to the conditions created by the formation of a federal 
union. In political institutions, also, fundamental similarity exists, 
since both countries are democratic. Evidently, then, the prop- 
erty taxes of the Swiss cantons operate under conditions closely 
resembling those with which the American student is familiar; 
they are in most, though not all, cases the mainstay of the state 
and local finances ; they have been adjusted more or less perfectly 
to the relations that exist under a federal system of government; 
and they have been shaped in accordance with the popular will 
of some of the most democratic communities in the world. 

I 

The property tax in Switzerland Is a very old institution; It 
is also, as we now find it, mainly the product of the nineteenth 
century. In the Middle Ages the German emperors levied direct 
taxes upon the property of their Swiss subjects. In the thirteenth 
and fourteenth centuries, as various cantons secured fiscal au- 
tonomy, property taxes were employed whenever occasion de- 
manded, as in ScliAvyz, for example, where as early as 1294 there 
was a tax on the capital value of property, and each citizen was 
required to make "a loyal and true" declaration of his entire 
fortune. These Imposts were, however, an occasional and ex- 
traordinary form of revenue, since In ordinary times the govern- 
ments were expected to subsist upon the Income from public 
property and the produce of Indirect taxes. Glarus and Geneva 
seem to have been the first cantons to make direct taxes upon 
property a regular and ordinary resource ; In the former the 

^ Reprinted from the P7'oceedings of the Fourth Annual Conference of the 
National Tax Association, pp. 53-S4. 



THE GENERAL PROPERTY TAX 351 

present general property tax, and in the latter the taxe mobiliere, 
have been in continuous operation since the last half of the seven- 
teenth century. Elsewhere the property taxes remained an ex- 
traordinary expedient, and early in the eighteenth century com- 
pletely disappeared. In 1798 the Plelvetic republic introduced 
taxes on land and movables ; but when the cantons regained their 
autonomy in 1803, most of them abolished these taxes,^ and 
undertook to finance themselves in the eighteenth-century 
fashion. But conditions were changing, and with the growth of 
democratic institutions were to change still more until direct 
taxation in some form or other became an absolute necessity. 
Then, and only then, were direct taxes upon property or incomes 
reestablished. Zurich led the way in 1832, and by 1856 had been 
followed by eleven other cantons. Between 1867 and 1879 four 
others reintroduced direct taxation ; Solothurn, the last to recon- 
cile itself to the new order of things, postponing its evil day until 
1894, when a series of deficits compelled the people to accept a 
combined property and income tax. Except in two cantons, 
therefore, the existing Swiss property taxes are of comparatively 
recent origin, and are a reluctant concession of Swiss democracy 
to the financial exigencies of the nineteenth century. 

The present status of these taxes is both similar to the status 
of the property tax in the United States and at the same time 
different from it. In Switzerland, as in our own country, the 
revenues of the federal government are derived chiefly from 
indirect taxes ; and direct taxation is reserved for the use of the 
state and local governments. There is not, however, in Switzer- 
land such a separation of the federal from the state and local 
taxes as prevails in the United States. The Swiss alcohol 
monopoly is administered by the Confederation, but the profits, 
which correspond to our tax on spirits, are divided among the 
cantons in proportion to their population; and the same is true 
of an unimportant tax on commercial travelers. The military 
exemption tax, imposed upon all persons liable to military serv- 
ice who do not perform such duty in any year, while regulated 
by federal law, is administered by the several cantons ; and the 
proceeds — a very substantial sum — are divided equally between 
the cantons and the Confederation. 

1 Glarus, Geneva, and six other cantons continued to levy property taxes. The 
last mentioned were newly created cantons which had no other resources. 



352 SELECTED READINGS IN PUBLIC FINANCE 

Prior to the establishment of a federal bank under the Act 
of 1905, most of the cantons derived a substantial revenue from 
a tax on the note issues of the cantonal banks. Since that event 
these issues have gradually disappeared, and with them the 
revenue from the bank taxes ; but the cantons, by way of com- 
pensation, are now receiving from the federal treasury an annual 
grant of over two million francs, which will be assumed by the 
federal bank: as soon as it is able to do so. And finally, the 
Confederation, out of the surplus accruing from very productive 
duties on imports, has granted subventions to the several cantons 
for the development of agriculture, promotion of education, con- 
servation of forests, and the improvement of roads and rivers. 
As a result, the cantons now receive from the federal treasury, 
and from the military tax collected under federal law, a con- 
siderable part of their income. In 1900 not less than 13 per cent 
of the gross revenues of the cantons, and a materially larger 
percentage of the net revenues, came directly from the federal 
treasury or from the military exemption tax. It goes without 
saying that such an arrangement materially lightens the pressure 
of cantonal taxation, even though, under the subvention system, 
the federal grants are usually conditioned upon further expendi- 
ture by cantonal or local authorities. 

It is further to be observed that the weight of cantonal and, 
more particularly, local taxation is considerably reduced by rev- 
enues derived from public property and industries. The income- 
yielding property of the cantons does not greatly exceed, if 
it exceeds at all, the cantonal debts ; and the income from this 
source is largely, if not wholly, offset by interest payments. From 
the cantonal banks substantial profits are realized, while from 
forests the revenues are small, since most of the public forests of 
Switzerland are owned by the local governing bodies and not by 
the cantons. The net result is that in some of the richer cantons 
the pressure of state taxation is materially reduced by the revenue 
from such sources, and that the average canton is more favorably 
situated than the average American state. Among the local gov- 
erning bodies conditions differ widely. In the cities the income- 
yielding property is generally much less than the municipal 
debts ; but municipal industries, with the exception of street rail- 
ways, usually yield a substantial profit and sometimes a very 
large one. In rural districts, on the other hand, communal in- 



THE GENERAL PROPERTY TAX 353 

dustries are less important, but income-yielding properties far 
exceed communal indebtedness. 

A large part of the forest area of Switzerland is owned by the 
communes, and the revenues from forests and other productive 
property materially lighten the weight of local taxation. There 
are, in fact, not a few communes where the income from public 
property and miscellaneous sources suffices to defray all local 
expenses, and communal taxation is unknown. Lest, however, 
1 give you a false idea of average conditions, I hasten to add that 
the number of communes levying no taxes is steadily decreasing, 
and that in many localities taxes are exceedingly high. Both can- 
tons and commimes, it appears, are increasingly dependent upon 
taxation, since other revenues have not in general kept pace with 
the growth of public expenditures. But up to the present the fed- 
eral subventions and the revenues from public property or indus- 
tries have made the financial conditions materially different from 
those which prevail in the United States, where both state and 
local governments are dependent almost exclusively upon taxes. 

Not only is taxation a relatively smaller factor in the revenues 
of Swiss state and local governments but its sources are far more 
diversified than in the United States. In 1902, according to our 
last census, not less than 82 per cent of the tax revenues of 
American state and local governments was derived from ad 
valorem assessments upon property. For Switzerland no similar 
statistics are available, but it is certain that the property tax, 
while usually more important than any other, furnishes a much 
smaller proportion of the aggregate tax revenues than in our own 
country. The various imposts employed are numerous and diffi- 
cult to classify, but for our purpose it will suffice to divide them 
into personal, sumptuary, license or privilege, transfer, income, 
and property taxes. 

Our first group includes poll, household, and habitation taxes. 
Cantonal poll taxes are usually levied at moderate rates ; but local 
poll taxes are sometimes very high, and, what is more, are 
rigorously collected. In the canton of Zurich there are many 
communes where the local poll tax ranges from 8 to 14 francs, 
to which must be added the cantonal tax of i^ francs ; and there 
are other cantons in which these figures are approached or even 
exceeded. In Vaud, where the tax is graduated according to the 
resources of the taxpayer, the rates in some places rise to 500 or 



354 SELECTED READINGS IN PUBLIC FINANCE 

600 francs. Household taxes, imposed on heads of households, 
are in use locally in a number of cantons, and range from i to 16 
francs per household. Where poll and household taxes coexist, 
as is frequently the case, every head of a household, even though 
he be a small farmer or common laborer, may have to pay a poll 
tax of from 10 to 16 francs and a household tax of from 8 to 14. 
The habitation or rental tax is used by the canton of Geneva and 
some of the larger cities of other cantons. Altogether it is evident 
that these taxes on persons, though not found everywhere, have 
in Switzerland a scope and rigor quite unknown in our own coun- 
try, with the possible exception of a few of the Southern states. 

Sumptuary taxes on servants, horses and pleasure carriages, 
billiard tables, automobiles, bicycles, and dogs are extensively 
employed by the canton of Geneva ; and elsewhere are represented 
chiefly by taxes on automobiles, bicycles, and dogs, with here and 
there a tax on billiard tables or pianos. With these we may in- 
clude the monopoly of the sale of salt, from which all of the 
cantons derive a certain amount of revenue. The produce of these 
taxes is nowhere very important, but it helps to reduce the pres- 
sure of direct taxes on property or income. In Geneva, at the 
present time, personal and sumptuary taxes furnish about 10 per 
cent of the tax revenue of the canton. 

License or privilege taxes are represented in all cantons by 
peddlers' licenses and the very interesting licenses for hunting 
and fishing; also by innkeepers' licenses and licenses to sell 
intoxicating liquors at retail, which in most cantons, on account 
of the customs of the people and political power of the licensees, 
are not as high as they ought to be, and very far below the rates 
now charged in many American states. Some cantons, too, im- 
pose taxes, or concession fees, on water-power privileges, and are 
beginning to derive a substantial revenue therefrom. And finally, 
in lieu of a tax on business profits, a few cantons impose a general 
license tax, modeled more or less closely after the French patente, 
on all occupations, industries, or professions. 

In practically all cantons certain transfer taxes yield a sub- 
stantial revenue, and in a few a general system of transfer and 
transaction taxes affords a very large income. First in impor- 
tance are the taxes on inheritances and gifts, which are found in 
nearly every canton and are relatively more productive than the 
inheritance taxes of the American states ; in 1900 they yielded 



THE GENERAL PROPERTY TAX 355 

about one sixth as much as all the direct taxes levied by' the 
cantons. Then come taxes on transfers of real estate, which are 
found in about two thirds of the cantons, and sometimes, as in 
Geneva, Vaud, Bern, and Zurich, afford a very large revenue. 
Two thirds of the cantons also impose stamp taxes on various 
commercial or legal transactions, and three tax transfers on the 
stock exchanges. In 1900 the cantons derived from transaction 
and transfer taxes other than inheritance taxes over one sixth as 
much as they received from all direct taxes ; with the inheritance 
taxes included, the yield of the transfer and transaction taxes 
amounted to approximately one third of the direct taxes. 

Geneva, which has developed these imposts into a general 
system of registration duties, after the French model, derives 
about as much revenue from them as it does from direct taxes ; 
in 1909 the canton received 3,353,200 francs from transfer and 
succession duties and 3,437,800 francs from taxes on real and 
personal property. In all such comparisons, I should add, it is 
to be remembered that the taxes of the Swiss cantons constitute 
a very large proportion of the total levied for state and local pur- 
poses, whereas in our own country the revenues of the states are 
but a small fraction of the combined county and municipal 
revenues. When Geneva, therefore, raises a third or more of 
her cantonal revenues by transfer taxes, she greatly lightens 
the burden resting upon property subject to taxation; whereas 
the average American state, in a similar case, would not very 
greatly reduce the total taxes falling upon property. 

The income tax is employed by twenty out of the twenty-five 
cantons. Usually it is designed to reach only incomes not de- 
rived from taxable property, such as business profits in excess 
of the current rate of interest on the invested capital, wages, 
salaries, and professional earnings. But in four cantons it ex- 
tends to all incomes, sa that there exists in these cases a so-called 
double taxation of property and the income therefrom. In one 
canton, Bern, the property tax is applied only to real estate and 
the mortgage indebtedness resting thereon, and the income tax 
reaches all incomes other than those derived from land and 
mortgages. 

The result is that the function and financial importance of the 
income tax vary greatly from canton to canton. Where its func- 
tion is merely to reach personal, industrial, and professional 



356 SELECTED READINGS IN PUBLIC FINANCE 

incomes, v/hich pay nothing under the property tax, the tax on 
incomes produces, on an average, perhaps one third as much as 
the tax on property. Its precise yield depends not only upon the 
comparative rates of income and property taxation but also 
upon the comparative completeness of the assessment of incomes 
and property. Where about one half of the taxable property 
evades assessment, as in Zurich, and there are large industrial or 
commercial centers in which the income tax is reasonably pro- 
ductive, the yield rises to 60 or 70 per cent of the income from 
the tax on property ; and where the conditions are reversed, as in 
Fribourg or Vaud, the income tax may yield but 12 or 15 per 
cent of the amount collected from property. 

Upon the other hand, in the four cantons where the function 
of the income tax is not only to reach personal, industrial, and 
professional incomes but also to bring about the so-called double 
taxation of property and income, the yield usually exceeds that 
of the property tax. In Baselstadt, for instance, in 1909, the 
cantonal and local income taxes yielded 4,081,000 francs, while 
the property tax, which is not used for local purposes, yielded 
but 2,124,000 francs. According to their function, therefore, 
according to the comparative rates of income and property taxa- 
tion, and according to the relative completeness of income and 
property assessment, the Swiss income taxes produce from 12 to 
190 per cent of the yield of the taxes on property. In general, 
it may be said that in the average canton a substantial revenue 
is derived from taxes on incomes, and that the burden resting 
upon property is thereby materially reduced. The situation is 
clearly different from that of the American states, in which the 
income tax seldom exists, and never produces enough revenue to 
make the average taxpayer or public official conscious of its 
existence. 

This excessively long introduction wiU have justified itself, 
perhaps, if it has made clear the fact that, although the status 
of the Swiss property taxes greatly resembles that of the prop- 
erty taxes of the American states, there are nevertheless im- 
portant points of difference. Federal grants and subventions 
lighten the weight of cantonal and local taxation ; revenues from 
property and public industries further reduce it ; the burden that 
remains is not thrown almost wholly upon property, as in the 
United States, but is distributed among a variety of direct and 



THE GENERAL PROPERTY TAX 357 

indirect taxes, so that the share finally falling to the property tax, 
while usually the largest,^ is relatively much smaller than in our 
own country. This fact I consider to be of capital importance. 
As will later appear, it goes far toward explaining the further 
fact that in Switzerland the property tax has not in general 
produced such intolerable conditions as attend its operation in 
the United States. 

II 

The constitutional status of the property tax in Switzerland is 
not unlike its status in our own country. The cantons are, gen- 
erally speaking, sovereign in the matter of internal taxation, but, 
like the American states, are limited by certain provisions of 
the federal constitution. There is, in the first place, the general 
guarantee of the equality of all Swiss before the law, which 
somewhat resembles the Fourteenth Amendment to our federal 
Constitution. This has been invoked in at least one case of 
alleged discrimination in taxation, but has not yet received the 
wide extension given to the Fourteenth Amendment by our Su- 
preme Court. There is also a general guarantee of freedom of 
industry and commerce from restrictive taxation, which in theory, 
and to some extent in practice, prohibits taxes so laid as to 
operate as a restraint on the trade or occupation concerned. 
And then, of far greater practical and theoretical importance, 
there Is a clause authorizing such federal legislation as may be 
needed to prevent double taxation. As yet no such legislation 
has been enacted; but the federal court, somewhat against its 
will, has been obliged to take cognizance of a large number of 
cases brought before it, and has formulated certain general prin- 
ciples which now control cantonal legislation at a number of 
points. The court has ruled that real property is taxable only 
at its situs, so that the cantons have no power to tax land outside 
their borders. Movables have been declared taxable only at the 
domicile of the owner, but this principle has been modified so 
far. as to make taxable at its situs capital invested in a branch 
establishment, industrial or commercial, and the investment of 
a limited partner in a soclete en commandite. With joint-stock 

1 In Geneva the extraordinary development of transfer and miscellaneous taxes 
reduces the property taxes to an almost subordinate position. In Baselstadt, 
Solothurn, and Tessin the so-called double income tax is more important than 
the property tax. 



358 SELECTED READINGS IN PUBLIC FINANCE 

companies, however, the court has held that to tax the companies 
at their seat and then tax the shareholders at their domiciles is 
not double taxation in the sense contemplated by the federal 
constitution. Other decisions concern persons successively domi- 
ciled in two cantons during a given year, and hold that only a 
proportionate part of any tax shall be paid in each canton. In 
general, the court has held to the theory that the double taxation 
contemplated by the constitution is that arising from inter- 
cantonal relations, and not that resulting from the legislation of 
a single canton. 

The constitutions of the several cantons, like those of most 
American states, contain more or less extensive provisions con- 
cerning taxation. The constitution of Baselland contains about 
all the law that exists in that canton concerning the taxation of 
property and income ; at the other extreme are constitutions that 
merely prohibit progressive taxation, fix the proportions that 
shall subsist between different taxes, limit the rates of direct 
taxation, or prescribe other general regulations. So far as I 
have yet found, none of them contains a requirement that every- 
thing must be taxed in the same way and at the same rate. In 
general, it is within the power of the cantonal authorities to 
classify property for taxation, and this is not infrequently done. 
Compared with the average American state, the Swiss canton is 
somewhat less trammeled by constitutional limitations, and there- 
fore better able to adjust its tax laws to present-day needs. 

The laws of the various cantons naturally enough differ at 
many points, but, like those of the American states, exhibit a 
general family resemblance. They either make all property sub- 
ject to taxation, and then proceed to allow certain exemptions, or 
else proceed by process of specification, exempting all that is not 
made specifically taxable. By the one process or the other such 
things as personal effects, household goods, artisans' tools, and 
agricultural implements are usually exempted in whole or in 
part. Thus far the laws run like those of the American common- 
wealths, but now begin exemptions quite foreign to the practice 
of most of our states. Cattle are wholly exempted In several 
of the cantons. In French Switzerland two cantons tax no 
personal property except interest-yielding investments. Bern 
exempts all personalty other than mortgages, preferring to reach 
the income therefrom through her income tax. Appenzell (I. Rh.) 



THE GENERAL PROPERTY TAX 359 

knows nothing of the general property tax, and confines direct 
taxation to real estate. A most interesting class of exemptions 
concerns real property. Geneva exempts buildings used for 
agricultural purposes, Schwyz exempts capital necessary for agri- 
cultural operations, and three other cantons tax agricultural 
buildings at only one half or three quarters of their value. One 
provides that all buildings shall be valued at two thirds of their 
actual worth. Personal exemptions granted to the sick, aged, or 
infirm, and to widows and orphans, find their counterparts in 
the United States ; but I know of no American state that, like 
Lucerne, accords a special exemption to heads of families; or, 
like St. Gall, acts upon the theory that the property of widows 
and orphans is more likely to be discovered than that of other 
persons, and therefore provides that it shall be assessed at only 
three quarters of its value. About half the cantons, finally, 
exempt a certain minimum amount of property, real or personal, 
the exemption ranging from 200 to 5000 francs ; so that in many 
cases even small estates in land are freed from taxation. 

The deduction of debts is permitted on a far larger scale than 
in the United States, and it may be said that in Switzerland 
people are usually taxed upon their net fortunes. In cantons 
where the rates of taxation are progressive, this is the only logi- 
cal course, since the absurdity of taxing a person progressively 
upon his debts is apparent to anyone possessed of even a rudi- 
mentary sense of humor. A distinction is, however, made in 
most cantons between mortgage and other debts, and the treat- 
ment accorded the former is less liberal than that extended to 
the latter. Ordinary debts, not secured by mortgage, can be 
deducted from the gross value of one's entire estate in all can- 
tons except Fribourg, where, however, the tax rate is propor- 
tional, and interest-yielding investments are the only form of 
personalty subject to taxation. Valais permits such deduction 
for the cantonal tax, but not for local taxation; Tessin forbids 
it if the creditor lives outside the canton ; and Geneva limits it 
to 50,000 francs. Concerning mortgage debts, the laws of 
the cantons vary about as widely as those of the American 
states. Appenzell (L Rh.), which does not tax personal property, 
naturally enough refuses to allow the deduction of mortgages; 
but all the others now permit deduction to a greater or less 
desrree. Two of them authorize it in all cases. Some allow de- 



36o SELECTED READINGS IN PUBLIC FINANCE 

duction only in case the landowner is a resident of the canton; 
others permit such resident landowner to deduct only in case the 
creditor lives in the canton and is taxed on the mortgage. Sev- 
eral allow nonresidents as well as residents the deduction, pro- 
vided the creditor lives in the canton and is taxed there. Others 
extend the privilege of deduction to nonresidents upon conditions 
which cannot be enumerated here. Geneva limits the amount 
deducted to 50,000 francs. A further complication arises from 
the fact that in some cantons where deduction of mortgages 
is permitted in connection with the cantonal tax it is not 
allowed in local taxation. And finally, the canton of Vaud, which 
permits deduction even for local taxation, authorizes the com- 
munes to levy, in addition to the regular tax, a special realty tax 
for which no deduction is permitted. The result is that in 
Switzerland resident landowners can usually deduct their mort- 
gaged debts, and that proprietors not resident in a canton are 
sometimes granted the deduction ; but that for local taxation the 
laws are somewhat less liberal. The general*situation is in strik- 
ing contrast with that of most American states, which tax real 
estate without deduction and then endeavor to tax mortgage notes 
as personal property. 

Most of the cantons require taxpayers to make a return of their 
taxable property, but a few cling to the method of official assess- 
ment, and ask for no declarations. About half confine the decla- 
ration to personal property, and tax real estate according to 
official estimate. Declarations are required annually in some 
cantons ; in others, at periods of from two to six years. Usually 
they must be in writing, but two cantons still accept oral state- 
ments. In two cases declarations are demanded only when a 
person settles in the canton, and thereafter assessments are re- 
vised annually by the officials. When real estate is assessed by 
official estimate, general revaluation takes place at such periods 
as from five to twenty years ; but in a few cases no definite time 
is set, and as a result land is sometimes taxed on the basis of 
cadastral valuations made half a century ago. The forms of 
declaration prescribed in the various cantons differ widely. Some- 
times the taxpayer is required to submit a very detailed state- 
ment resembling those which most Americans conscientiously 
abstain from making; in other cases, including cantons where 
personal property is most successfully taxed, nothing is required 



THE GENERAL PROPERTY TAX 361 

but a bare declaration that the net taxable property amounts to a 
certain sum, and that thereof a certain part represents the value 
of real estate. In Geneva, where personal estates are taxed with 
conspicuous success, the taxpayer makes no declaration of his 
property, but states merely the amount of the tax due from him. 
So far as I can learn, no canton requires the declaration to be 
under oath, but in some cases oaths are required if a person 
wishes to appeal from an assessment made by the officials. The 
statements of taxpayers are subject to official revision, and per- 
sons who make no declaration are assessed by the officials and 
frequently lose their right of appeal. 

For recalcitrant or dishonest contributors the laws provide the 
usual terrors, together with some that are not usual. Persons 
who make no declaration, besides being assessed by the officials 
and losing the right of appeal, are sometimes fined. For continued 
recalcitrancy at least one canton prescribes cumulative doomage. 
False returns are punished by fines of larger or smaller amount, 
and one canton even authorizes imprisonment. Where evasion is 
detected, nearly all the cantons promptly proceed to recover back 
taxes for periods varying from two to twenty years, and add 
thereto fines varying from 100 to 2000 per cent of the amounts 
withheld. Back taxes for five years and a penalty of five times 
the amount of the taxes represent, perhaps, the average rigor of 
the laws. For the detection of evasion there are two principal 
agencies. One is the returns of estates subject to the inheritance 
tax, which may be made in the first instance by heirs, but are 
naturally subject to official control. The other is the compulsory 
official inventory made at the taxpayer's death, and pending which 
his books and papers are placed under seal. Seven cantons now 
have the official inventory; the others content themselves with 
returns of property subject to the inheritance tax and such other 
information as the assessors are able to gather. In general, the 
Swiss laws are more severe than those of most American states, 
,but no canton has yet hit upon the Ohio expedient of dragging 
Ibank officials into court and compelling them to testify con- 
cerning the affairs of their customers. On the contrary, Swiss 
banks can refuse to give information about their customers' 
affairs, and uniformly would refuse to do so if the request 
were made. 

Tax rates are much more stable in Switzerland than in the 



362 SELECTED READINGS IN PUBLIC FINANCE 

United States. Sometimes the rate of the cantonal tax is fixed 
by the constitution or by a general law not easily changed. Even 
Avhen it is nominally variable, it does not fluctuate much from 
year to year, and in practice is likely to remain stationary over 
considerable periods. Variable rates are generally considered 
an evil, while proposals to increase existing rates must often be 
submitted to popular vote and are usually rejected; so that the 
cantonal authorities must ordinarily content themselves with a 
stationary tax rate for property and income, and adjust their 
budgets accordingly. For local taxation the rates are subject to 
more variation, but probably fluctuate less than local tax rates 
in the United States. A few cantons have established maximum 
rates which communes are under no circumstances permitted to 
exceed ; some others fix a rate Avhich the communes cannot exceed 
without permission of the cantonal authorities. 

The rate is usually the same for real and personal property, 
but this is not always the case. Four cantons impose a lighter 
rate on real estate than on personalty. In a number of others the 
rate is nominally the same, but realty is in fact less heavily taxed 
than personalty by virtue of provisions that it shall be assessed 
for only 70 or 80 per cent of its value, or that buildings shall 
be assessed at two thirds of their value, or that agricultural land 
shall be assessed at 70 per cent of its value, or that buildings 
devoted to agricultural purposes shall be exempted in whole or 
in part. Upon the other hand, one canton, after taxing land and 
movables equally under the property tax, imposes on real estate 
a second tax based upon the income it yields. It should be said, 
however, in this connection, that many cantons tax transfers of 
real estate; and that such taxes sometimes, as in Vaud and 
Geneva, go far to offset the lower rate of taxation for real prop- 
erty. At least one canton, finally, gives to forests a separate 
classification, and assesses them either at one half their present 
exchange value or at twelve and one half times their average net 
yield for the last ten years. 

Switzerland has been called the home of progressive taxation, 
and much has been written about the progressive rates of her 
property, income, and inheritance taxes. While sometimes prac- 
ticed in the Middle Ages, progression was not extensively em- 
ployed until the last half of the nineteenth century, during which 
it steadily grew in favor. In some form or other it is now found 



THE GENERAL PROPERTY TAX 363 

in nearly all the cantons, but not necessarily for all taxes, and in 
the taxation of property is less used than in the taxation of in- 
comes and inheritances. In eleven out of the twenty-five cantons 
the property tax is proportional, and in six of the others local 
taxes must be proportional, although the cantonal taxes are pro- 
gressive. The methods of applying progression are various, and 
have been variously classified by different writers. All have their 
respective advantages and disadvantages, a discussion of which 
would carry me too far afield. The important thing for present 
purposes is that the scale of progression, while sometimes sharp, 
does not suggest a desire to confiscate large fortunes ; and that, 
wherever the taxes on large estates seem excessive, this result is 
due not so much to the progressive scale as to the fact that the 
taxes are too heavy all along the line. I am of the opinion, how- 
ever, that some of the cantons have carried progression quite as 
far as is safe or financially profitable. For this country Swiss ex- 
perience can offer nothing of present profit, since, until we have 
a tolerably complete assessment of taxable property, progression 
would mean nothing but graduating- a person's tax rate accord- 
ing to his ability or inclination to dodge his taxes. 

The taxation of corporations offers such a favorable field for 
diversity of methods that Swiss lawmakers v/ould have been more 
than human if they had failed to take advantage of it ; and the 
decision of the federal court that the constitution of the Con- 
federation does not prohibit double taxation of the property of a 
corporation and its capital stock, has left them entirely free to 
do their best — or worst. About one third of the cantons tax 
corporations domiciled within their borders, usually in the same 
manner as natural persons, and exempt the shares of these com- 
panies, shares of companies not domiciled within the canton re- 
maining subject to taxation. Nearly a third more tax the shares 
like other personal property, and then tax the company on some 
part of its property, or on its income, or in some other way that 
results in the company's paying something less than the ordinary 
assessment on all its property. Vaud seeks to avoid double taxa- 
tion by making the shares taxable to the holders for their par 
value, and then taxing the companies on their reserve and other 
surplus funds, including sinking funds. Double taxation of stock- 
holders and the property of the corporation is practiced in a few 
cantons, but in at least one of these, Baselstadt, the tax levied 



364 SELECTED READINGS IN PUBLIC FINANCE 

on the corporation is so moderate that it leads to no complaint, 
and may perhaps be defended as a franchise tax. 

What has been said applies particularly to cantonal taxes ; for 
local taxation some cantons suspend all rules of the game, and 
allow the communes to pluck as many feathers as they please 
from any portion of any goose that may chance within their 
reach. Not unnaturally, this results in more squawking than is 
consistent with sound principles of finance. Other cantons sus- 
pend only part of the rules, and thus extend partial protection. 
Vaud applies to communal taxation the same regulations that 
govern cantonal, and so prevents double taxation. If cantonal 
taxation is diverse, communal is chaotic ; and in general it may 
be said that in this matter our American states, although suffi- 
ciently in need of instruction, have little to learn from the laws 
of most of the Swiss cantons. 

In a majority of the cantons the taxes levied for local purposes 
exceed those for the use of the cantons, but in no such over- 
whelming proportion as in the United States, while in a number 
of cases cantonal taxes exceed communal. One canton confines 
communal taxation to a tax on incomes, and in the city of Geneva 
the municipal tax is a combined income and occupation tax. But 
elsewhere the property tax is used for local purposes, though 
usually in combination with income, poll, household, habitation, 
and even other taxes. In most, if not all, cases the tax on prop- 
erty is more important than any of the others, and the rates are 
sometimes very high, here and there approaching those prevail- 
ing in the United States. In French Switzerland, where com- 
munal administration in any locality is centralized in the hands 
of a single governing body, the political commune, the citizen 
pays but one tax in respect of his property. But in the German 
cantons, where local administration is parceled out among a 
number of different sorts of communes, we find separate school 
taxes, church taxes, poor taxes, and finally "police" taxes which 
are for the general expenses of civil government. In former 
times the communes, like the Massachusetts towns during the 
seventeenth century, were allowed great freedom in matters of 
taxation ; and in a few cantons to-day they are subject to little 
regulation. But the chaotic conditions resulting from such "local 
option" have led most of the cantons to regulate local taxation 
by general law. Sometimes the rules prescribed for the local 



THE GENERAL PROPERTY TAX 365 

taxation of property are the same as for cantonal ; but frequently 
they differ at certain points, as we have had occasion to remark. 
The deduction of mortgage debts is not so generally permitted 
for local taxation as for cantonal, smce it would leave some com- 
munes very little taxable property. In dealing with corporations 
the cantonal laws designed to prevent double taxation are often 
suspended — perhaps for a similar reason. And finally, progres- 
sive taxation is frequently prohibited, even in cantons that make 
their own taxes progressive, either because deduction of mort- 
gage debts is not permitted, or because it is realized that the 
taxable property which a citizen owns in a single commune may 
be only a part of his fortune. 

Ill 

Such in outline are Swiss methods of taxing property. Now, 
how do they work ? 

It will be convenient to begin with the taxation of real estate. 
Land is supposed to be assessed either at its selling value or ac- 
cording to the capitalized average yield. In cities the former 
basis is naturally the one generally adopted, but in many rural 
districts, where transfers are infrequent, the latter is easier to 
apply. There are undoubtedly many cases where assessment ac- 
cording to the selling price gives a higher valuation than assess- 
ment according to the capitalized average yield. A generation 
ago, when expenditures were smaller and taxes lower, the 
assessment of land was considerably below the true value ; but 
more recently the need for increased revenue has obliged as- 
sessors to raise the valuation. In the cities, generally, assess- 
ments are now tolerably close to the true values, but in rural 
districts they are probably on a relatively lower basis. There 
are, doubtless, exceptions to the rule ; but in most of the cantons 
it appears that, in respect of real estate, the cantonal taxes fall 
with undue weight on the urban districts. Large tracts of forest 
and pasture land belonging to rural communes are assessed for 
state taxation at only a third or a half of their value. Local 
assessors sometimes deliberately aim at low valuations in order 
to reduce the commune's contribution to the cantonal tax. In a 
few cantons there has been no general revaluation for an absurdly 
long time, and some other conditions exist which resemble those 
known in the United States. I incline, however, to the opinion 



366 SELECTED READINGS IN PUBLIC FINANCE 

that the inequalities in the valuation of land in Switzerland are 
seldom as great as in our own country, that the average condi- 
tions are considerably better^ there than among us, but that in 
some localities in the United States the assessment of real estate 
is quite as satisfactory as in any of the Swiss cantons. 

Buildings are usually assessed at about the figure for which 
they are insured, though special conditions sometimes warrant 
a departure from this rule. Since in most of the cantons insurance 
is compulsory, this part of the assessors' task is a comparatively 
simple matter. The partial or total exemption of buildings used 
for agricultural purposes tends sometimes to reduce the share of 
the cantonal tax falling upon rural districts, and there is reason 
for thinking that in rural communes assessors sometimes deal 
more leniently with all buildings than city officials are wont to do. 

Some cantons, as we have seen, impose a lower rate of taxation 
on realty than on personalty ; and others, by exempting a part of 
the value of buildings, or land and buildings, accomplish sub- 
stantially the same result. This is occasionally justified on the 
ground that inasmuch as some personal property evades taxation, 
it is only fair that realty should have a lower rate. The usual 
justification is that it is a necessary concession to the agricultural 
interests, which stand in special need of the fostering care of gov- 
ernment. The actual reason, however, for the favored position 
accorded to real property is that in most of the cantons a ma- 
jority of the voters are small proprietors and are able to help 
themselves to anything they may desire. With the growth of 
public expenditures and the need of additional revenue the sub- 
ject is beginning to attract attention. In the cities, and sometimes 
elsewhere, taxation of the increment of land values is frequently 
proposed ; and one small commune has recently voted to intro- 
duce such a tax. Whatever the outcome of the present discussions 
concerning land taxation, it seems clear that the favors accorded 
to real estate in some of the cantons are without justification, and 
invite correction aY the earliest possible moment. 

The deduction of mortgages is a topic of peculiar interest. In 
most, if not all, of the cantons the mortgage indebtedness resting 
upon the land is surprisingly large. Although it is sometimes as 
low as 25 per cent of the assessed valuation of real estate, the 
average for all Switzerland is probably as high as 40 per cent; 
while there are not a few cantons where it exceeds 50 per cent 



THE GENERAL PROPERTY TAX 367 

of the realty valuations, and considerable districts where it rises 
to 60 or even 70 per cent. It is not strange, therefore, that, for 
local taxation, the deduction of mortgages is frequently pro- 
hibited, even when it is permitted for the cantonal taxes. Several 
causes have contributed to produce this large mortgage indebted- 
ness, and it is not easy to say how important a factor tax laws 
may have been ; but it is clear that the right to deduct mortgages, 
so generally granted in Switzerland, has been a material factor 
in the situation. In cantons where the tax on personal property 
is wideF)^ evaded (and we shall see presently that there are such) 
a person can mortgage his land and invest the proceeds in se- 
curities which will partly or wholly escape taxation. Then, too, 
Avhen the local tax on real property is progressive, it is obviously 
to the advantage of a nonresident proprietor to mortgage his land, 
since he thereby reduces the net value of his property and gains 
the advantage of a lower tax rate. Even when the tax on per- 
sonalty is not evaded, and the rate is proportional, it is evident 
that exemption from double taxation, while it offers no special 
inducement to borrowing, removes an obstacle to the conversion 
of a part of one's real estate into personal property promising a 
higher rate of interest than is paid upon the mortgage. 

There has been in Switzerland some complaint of excessive 
taxation of forests, and in 1889 the Society of Swiss Foresters 
turned for relief to the federal government, which could take 
no action, since the matter was one in which the cantons are 
sovereign. At least one canton has provided a special method 
of taxing forests, but usually private forests are subject to the 
property tax. Yet conditions are widely different from those 
prevailing in the United States, and the general result is much 
better. In the first place, a very large proportion of the forest 
area is owned by the communes, and is therefore exempt from 
local taxation. Then the law prohibits indiscriminate cutting, so 
that the value of a forest depends upon its sustained yield rather 
than on the profit that can be made from stripping the land of 
every stick of timber. And finally, the method of assessing land 
according to the capitalized average yield results in a lower 
valuation and is more favorable to rational utilization than the 
usual provision of American laws that land shall be assessed at 
its selling value. Swiss methods of taxing private forests may 
not be all that could be desired — upon that subject I am prepared 



368 SELECTED READINGS IN PUBLIC FINANCE 

to express no opinion ; but it is clear that the Swiss property taxes 
are far less injurious than those of the American states in so far 
as the latter are enforced. 

We turn to the taxation of personal property. The results 
achieved in different cantons vary all the way from bad to satis- 
factory, through a variety of intermediate grades which I will 
not undertake to characterize. At the worst, conditions are bet- 
ter than in most American states ; at the best, they are about as 
good as under any system of personal property or income taxa- 
tion, and I do not except the income taxes of Great Brifain and 
Prussia. While I am not yet prepared to assign a definite status to 
every canton, I believe that, in respect of the taxation of personal 
property, the Swiss states may be divided into four groups. 

The first includes the two city cantons, Geneva and Baselstadt, 
and perhaps canton Vaud, where the taxation of personal prop- 
erty is conspicuously successful. Declarations are actually made 
by practically all taxpayers, as required by law, and the propor- 
tion of incorrect returns is comparatively small. Such evasion as 
exists is confined largely to the smaller properties, while the 
large estates are in general returned with scrupulous fidelity. In 
official reports of Geneva one may find such statements as the 
following: "Half of the revenue from the tax on personalty, or 
about 600,000 francs, is turned in by about one hundred contrib- 
utors, who, it should be recognized, have fulfilled their obliga- 
tions with absolute correctness and loyalty. It is not among them, 
but rather elsewhere, that one must look for evasions that cause 
loss to the treasury." In Baselstadt, where there is a double 
property and income tax, less than 4 per cent of the taxpayers 
paid 74.4 per cent of the income tax for 1908; and statistics of 
the property tax, if they were available, would probably make 
an equally remarkable showing. In both Geneva and Basel a 
progressive rate of taxation contributes largely to the results just 
stated, but it is also clear that without a substantially complete 
return of the larger properties the progressive rates would not 
be as productive as they are. Equally significant is the fact that 
in Geneva, in 1909, the tax on personalty yielded 2,135,900 francs, 
and that on realty 1,301,900. After making allowance for the 
circumstance that the rate of taxation on personal property is 
higher than that on realty, it remains true none the less that the 
assessment of the former is larger than that of the latter. I do 



THE GENERAL PROPERTY TAX 369 

not wish to overdraw the picture. I know very well that no taxa- 
tion of income or personal property can be wholly free from 
evasion, and am sure that some evasion exists at Geneva and 
Basel. But it is probable that in those cities not less than 80 or 
90 per cent of the taxable personalty is returned for taxation, 
and it is certain that public opinion condemns tax dodging and 
supports the strictest enforcement of the law. There is, then, no 
reason for thinking that the tax on personal property in Geneva 
or Basel is less successful than the income taxes of such coun- 
tries as Great Britain or Prussia. Whether Vaud does equally 
well may perhaps be doubted. Geneva and Basel are practically 
city states, and a uniform enforcement of the law is comparatively 
easy. Vaud, however, presents a variety of local conditions, 
communal tax rates are sometimes high, and the canton has 
reached its present fairly satisfactory position only after a bitter 
struggle over progressive taxation, the marks of which are not 
yet wholly effaced. That she is tolerably successful in enforcing 
the taxation of personal property cannot be doubted ; I hesitate, 
however, to accord her the same rank as Geneva and Basel. 

The second group includes a number of cantons, like Aargau 
and Solothurn, where severe laws, accompanied by vigorous 
efforts to enforce them, result in a fairly complete assessment 
of personal property, but unfavorable conditions in many locali- 
ties render impossible such results as are obtained in Geneva and 
Basel. The cantons of this group probably tax from 60 to 70 
per cent of the personalty subject to assessment, but in some com- 
munes the local tax rates are so high as to make it impossible for 
a person to pay his taxes upon a full valuation of his property. 
The result is that the law is not strictly enforced in such com- 
munes, or else that wealthy taxpayers take up their residence in 
localities where the rates are lower. The conditions that exist 
resemble at many points those which in the United States attend 
attempts to enforce vigorously the taxation of personal property ; 
but in general these cantons have done very much better than 
any American state of which I have knowledge, and in them the 
tax on personalty, if not a conspicuous success, is far from being 
an utter failure. 

In the third group belong a number of cantons in which con- 
ditions somewhat resemble those which prevailed in Massa- 
chusetts, and perhaps other American states, before the Civil 



370 SELECTED READINGS IN PUBLIC FINANCE 

War. Here the terrors of the official inventory are unknown, 
and in other respects the laws are less severe than those of Vaud, 
Aargau, or Solothurn. Methods of enforcement, also, while not 
deserving to be called lax, are usually less rigorous than in the 
cantons of the first and second groups. Yet the rates of taxa- 
tion are low; and, despite milder laws and administration, a sub- 
stantial amount of personal property is actually assessed, per- 
haps as much as 50 or 60 per cent of that liable to taxation, and 
occasionally somewhat more. In this class I should place Neu- 
chatel, Zug, Uri, Nidwald, Obwald, and perhaps three or four 
others. Forty years ago the majority of the cantons employing 
the property tax might have answered to this description, but in 
some of these the growth of expenditures and taxes has either 
forced a change of methods of administration or produced the 
conditions that prevail in cantons of the next class. 

To this fourth group belong notoriously Zurich, St. Gall, 
Appenzell (A. Rh.), Tessin, and probably Thurgau. In these 
cantons conditions approximate, though perhaps they seldom 
equal, those common in the American states. Few people 
make declarations, as required by law, and even fewer make 
honest ones. Personal property either evades assessment or tends 
to concentrate in localities where tax rates are low. Officials 
hesitate to enforce the law, because under existing conditions it 
is practically unenforcible, and public opinion will not sanction 
strict enforcement. Small properties or incomes and the estates 
of widows or orphans are heavily taxed, being required to contrib- 
ute one fourth or one third of the income, while wealthy per- 
sons, able to evade the law, escape with a relatively small assess- 
ment. To an American audience it is unnecessary to describe in 
greater detail conditions so very similar to those prevailing in 
the United States. 

How are we to account for the widely divergent results ob- 
tained by the various cantons in the taxation of personal prop- 
erty ? Clearly not on the ground of differences in the character 
of the people, for in point of general honesty and respect for law 
it does not appear that the people of Zurich or St. Gall are in- 
ferior to those of Basel or Geneva. Nor is it a mere matter of 
severity in the provisions of the laws or of rigor in their execu- 
tion. The milder laws and administration of the third group of 
cantons yield better results than more drastic measures employed 



THE GENERAL PROPERTY TAX 371 

by cantons of the fourth group. Zurich and St, Gall provide 
quite as heavy penalties as Basel and Geneva, yet do not get the 
same results. Appenzell (A. Rh.) has the dreaded official inven- 
tory, as has Thurgau for certain cases, yet personal property 
largely escapes them ; while it is well taxed in cantons that, like 
Basel and Geneva, content themselves with the returns of estates 
subject to the inheritance tax and such casual information as may 
come to the officials. Even state supervision of local assessments, 
while good in itself and productive of excellent results, is power- 
less to secure the enforcement of the laws under the conditions 
that exist in the fourth group of cantons, as the experience of 
Zurich, St. Gall, Thurgau, and Appenzell (A. Rh.) sufficiently 
demonstrates. Upon all these points Swiss experience teaches 
the same lesson as American : Draconian laws and drastic ad- 
ministration are of no avail under conditions that make rigid 
enforcement of the law disastrous, and therefore intolerable. 

No single cause has produced the diverse conditions prevailing 
in the different groups of cantons, but beyond question the most 
important factor in the problem is the rate of taxation. Where- 
ever in Switzerland personal property is taxed with reasonable suc- 
cess, the rate is comparatively moderate ; and wherever the rate 
exceeds the bounds of moderation, the severest laws fail to pre- 
vent general evasion. The cantons of the first group impose rates 
that vary from 40 cents per $too to 70 cents per $100 for the larg- 
est estates, and for smaller properties, subject to the lowest rates 
of the progressive scale, are decidedly less. Those in the second 
group suft'er from high rates of communal taxation in certain 
localities. When the combined state and local taxes range from 
40 to 60 cents per $100, the property tax may be said to work 
well ; and in communes where it rises to $1 or $1.20 per $100, the 
attempt to reach personal property utterly fails. The cantons of 
the third group, by reason of their economic 3,nd financial posi- 
tions, get along with a low rate of taxation for property, and 
their combined state and local taxes range from 30 to 60 cents 
per $100, seldom exceeding the higher figure, and sometimes not 
reaching the lower. As a result, their less drastic laws and milder 
administration suffice to reach a substantial proportion of the 
taxable personal property, as was the case in Massachusetts and 
perhaps other American states during the first half of the nine- 
teenth century. And finally, the cantons of the fourth group are 



372 SELECTED READINGS IN PUBLIC FINANCE 

vainly endeavoring to enforce taxation of personal estates at 
rates which, for combined cantonal and local purposes, usually 
range from 80 cents to $1.20 per $100, and in many cases rise to 
$1.50 or $2 per $100. The only possible result is hopeless failure. 
This point is so important that you will bear with me if I 
make my illustrations more specific. In Geneva the mobiliere, or 
personal-property tax, is used only for cantonal purposes, al- 
though in the city of Geneva there is a light local tax on the 
income of personal as well as real property. The rate, moreover, 
is fixed, and for the largest estates is at present 38J4o cents per 
$100. In Baselstadt the rate of taxation on property and income 
is also fixed, and for estates of the largest size the combined 
property and income tax in 1909 amounted to 62 cents per |ioo. 
In Vaud the mobiliere is used for local purposes, and in some 
communes the rate is fairly high. The combined state and local 
rates usually range from 60 to 70 cents per $100 for large estates ; 
and precisely because they sometimes rise to 70 cents or even 
higher, the canton is probably not in as good a position as Geneva 
and Basel. At the other end of the scale, in the fourth group, 
the canton of Zurich levies a state tax at a rate exceeding 40 cents 
per $100 for the larger estates, to which are added communal 
taxes averaging more than 80 cents per |ioo. In some cases the 
communal rates rise to $1.40 per |ioo, so that a large property 
will be taxed at a rate of $1.80 per $100. In the second group 
local conditions are worse than in Vaud, and seldom so bad as 
in Zurich, which accounts for the intermediate position of these 
cantons. In the third group the cantonal taxes vary from 3 to 25 
cents per |ioo, and the local range from zero to 40 or 50 cents 
per $100. Thus, in Neuchatel, the cantonal tax is 20 cents per 
$100, while local rates usually range from 20 to 30 cents per $100, 
and by law are limited to a maximum of 40 cents, so that the total 
tax levied on property is usually from 40 to 50 cents per $100, and 
can never exceed 60 cents. In Obwald the cantonal rate is but 3 
cents per $100, and the local rates range from 20 to 30 cents per 
$100; in Uri and Zug both cantonal and local taxes are usually 
higher than in Obwald, but the total seldom exceeds 50 cents per 
$100, and is often considerably less. In most parts of Switzerland 
the local taxes are higher than the cantonal, and the excessive 
rates sometimes prevailing are the chief cause fo^ the unsatis- 
factory working of the property tax in some of the cantons. 



THE GENERAL PROPERTY TAX 373 

Perhaps some of you may ask whether I have not put the cart 
before the horse ; and whether the high rates of taxation in certain 
cantons are not the result of evasion of the tax on personal prop- 
erty rather than the cause of it. I reply that historically they 
have been both cause and effect ; but that, once established and 
accepted by the taxpayer as inevitable, they become the cause 
of a chronic state of evasion which nothing but a radical change 
in the system is likely to cure. This point I can make clear by 
the example of my own state. Prior to 1850, when rates of taxa- 
tion in Massachusetts were less than one third of their present 
average, which is in excess of $1.70 per $100, a substantial pro- 
portion of the property assessed consisted of personal estates ; in 
Boston the proportion of personalty varied from 40 to 50 per 
cent of the total assessment. But when growing expenditures 
subjected the property tax to a pressure it was not able to stand. 
personal property began largely to escape taxation; and this 
increasing evasion then became a second factor contributing to 
the further rise of tax rates. By the early seventies, when the 
average rate in the commonwealth had advanced to $1.50 or $1.60 
per $100, taxpayers had adjusted themselves to the changed con- 
ditions ; and, therefore, when they made or abstained from mak- 
ing returns of their taxable property, acted upon the reasonable 
and inevitable assumption that the tax rate would be about 1 1.50 
or $1.60. Thirty years of added experience have now hardened 
this assumption into an accepted fact, and it is therefore correct 
to say that the high rate of taxation makes a full assessment of 
personal estates impossible in Massachusetts. 

It is by a generally similar process that the property tax in 
certain Swiss cantons has broken down. In Switzerland, as in 
the United States, the last fifty years have witnessed an un- 
precedented increase of public expenditures. According to Schanz 
and Cerenville, the total federal and cantonal taxes of Switzer- 
land increased from 18,800,000 francs in 1856 to 51,200,000 francs 
in 1876 and 109,000,000 francs in 1896, more than doubling in 
each period of twenty years. At the present time they exceed 
160,000,000 francs, and are still rising. If the total communal 
taxes could be ascertained, the showing would be even more 
striking, since almost everywhere they have increased by leaps 
and bounds. Thanks to abundant revenues from custom duties, 
the Confederation until recently has been little embarrassed by 



374 SELECTED READINGS IN PUBLIC FINANCE 

the rising tide of expenditure; but the cantons and communes 
have had no similar resource at their command. Some of them, 
by voluntary or enforced economy, have restrained, but not 
altogether prevented, the increase of outlay. Some, by thrifty 
husbandry, contrive to draw larger revenues from property or 
industries. Some have made large use of transfer and transaction 
taxes, and most have laid heavier hands on inheritances and suc- 
cessions. Here and there local taxes on polls and households 
have risen to extraordinary figures. But most cantons . and a 
majority of communes have been unable to avoid increased pres- 
sure on property and income. Income taxes have been intro- 
duced where formerly only property taxes existed, and in one 
case a property tax where there had been only a tax on incomes. 
Withal there has been a sharper assessment of taxable prop- 
erty or incomes, with a sharper graduation of rates designed to 
secure more revenue from the larger contributors. In proportion 
as expenditures have been held in restraint or other sources of 
revenue developed, pressure on the property tax has been reduced, 
and a breakdown averted. The cantons where personal property 
is successfully taxed to-day are those which have managed to 
keep the pressure within reasonable bounds, and those which fail 
to do so are the ones that have done what the American states 
did during the last half of the nineteenth century. Not a few 
cantons have improved their methods of administration and im- 
parted increased rigor to their tax laws. These measures have 
had excellent results when other conditions were favorable, but 
they have utterly failed to bring about a satisfactory assessment 
of personal property for taxation at the rates of $i or $1.50 per 
Si 00. The fundamental factor in every canton has been the tax 
rate. A property tax levied at the rate of 50 cents per $100 is 
one thing, a tax levied at the rate of $1 or Si. 50 per $100 is 
quite another. The former, as Swiss experience shows, may be 
enforced with conspicuous success; the > latter never has been, 
nor can be, enforced in respect of any kind of property capable 
of concealment or undervaluation. 

The taxation of incomes is in most cantons so 'closely con- 
nected with the taxation of property that I am constrained to 
refer briefly to the results attained. Speaking broadly, there can 
be no question but tliat the Swiss cantons have found the supple- 
mentary income tax on personal, professional, or industrial in- 



THE GENERAL PROPERTY TAX 375 

comes a useful adjunct of the tax on property. It is enforced 
with at least tolerable success, yields a substantial revenue, and 
places under contribution a class of incomes which, under a pure 
property tax, would pay nothing. At this point Swiss experience 
has been absolutely different from that of the handful of Amer- 
ican states that have experimented with a tax on incomes, but 
with so little success that the average taxpayer hardly knows of 
its existence. Concerning the working of the double system of 
property taxation in Baselstadt, Baselland, Tessin, and Solothurn, 
I prefer within the necessary limits of this paper to say nothing. 
The picture, however, is not all light ; it undoubtedly has shadows 
which sometimes are rather dark. In agricultural districts taxa- 
tion of incomes partly or almost wholly breaks down. The far- 
mer believes that the use of his house, the living which his family 
gets off the farm, and everything else except the savings he puts 
into the bank are not — or at least should not be — included under 
the head of taxable income ; and accordingly he does not include 
them. Where agricultural earnings are taxed on the basis of 
taxpayers' declarations, entire districts of great fertility contrib- 
ute little or nothing ; and the burden of taxation falls, therefore, 
with undue weight on industrial or commercial centers where 
incomes can be better ascertained and assessed. Thus, a city that 
pays 16 per cent of the cantonal tax on property may pay 36 per 
cent of the tax on incomes, and one that pays 13 per cent of the 
former may pay 39 per cent of the latter. To meet this difficulty, 
one canton arbitrarily fixes the taxable income from agriculture 
at a certain percentage of the value of the land, and another fixes 
the tax on agricultural incomes at three eighths of i per cent of 
the value of the land. Nor is the difficulty of taxing agricultural 
incomes the only one encountered. Small merchants and manu- 
facturers frequently do not know the size of their incomes, and, 
like the farmers, think they should be taxed only on what they 
save. In Baselstadt, where the larger incomes are supposed to 
be pretty fully returned, it is evident that smaller incomes evade 
assessment to a considerable extent. Naturally enough, persons 
receiving fixed salaries or wages are unable to escape, and in 
some cantons, particularly Bern, it is believed that this class of 
contributors is considerably overtaxed. Altogether Swiss ex- 
perience, while not unfavorable to state taxation of incomes, 
shows that such taxes present difficulties much like those en- 



3/6 SELECTED READINGS IN PUBLIC FINANCE 

countered in taxing personal property, and for their successful 
operation require the very best methods of administration. 

A subject that I cannot wholly ignore is state supervision of 
the assessment of property and income. In Switzerland, as in our 
own country, the assessment of property is, in the first instance, 
intrusted to local officials; and there, as here, it has been found 
advantageous to bring the process of assessment under state su- 
pervision or control. Swiss communes, like American municipal- 
ities and counties, naturally desire to attract or keep wealthy 
residents and large employers of labor; and to do so are often 
willing to make concessions inconsistent with both spirit and 
letter of the law. Actual bargains between assessors and tax- 
payers have probably been rarer in the Swiss cantons than in the 
American states, yet they are not unknown. Still more common 
are cases where local officials are unable to withstand the threat 
of withdraw^al of property to some other commune where tax 
rates are lower or the officials more given to hospitality. In can- 
tons w^here local tax rates are usually high, there seem always to 
be cities of refuge where oppressed taxpayers are assured of a 
cordial w^elcome. On Lake Constance and on the Rhine there are 
said to be colonies of wealthy people, who in selecting their places 
of domicile have considered, among other things, the advantages 
of a low tax rate and perhaps a moderate assessment. Then 
there are cases where a small commune is dominated by a large 
corporation which employs a majority of the inhabitants. In one 
canton there is a commune in which all voters and officials are 
employees of a large company which, as a consequence, used to 
enjoy a kind and amount of "home rule" in taxation inconsistent 
with the interests of the cantonal treasury. 

To meet such conditions, state supervision and control have 
been introduced. Most of the cantons now provide for revision 
of the local assessments by a special commission appointed by 
the cantonal authorities. I hesitate to compare these commissions, 
with the boards of equalization known to most American states ; 
but in some cantons at least it appears that the commissions of 
revision have failed to revise just as our boards of equalization 
have usually failed to equalize, and for the same reason— lack 
of authority, time, and knowledge necessary for the task. I be- 
lieve, however, that there have been cases in which the Swiss 
commissions have been able to accomplish valuable results. Not 



THE GENERAL PROPERTY TAX 377 

a few cantons go farther, and appoint members of the local 
assessment boards. One adds to each communal board a can- 
tonal representative with merely consultative powers ; three ap- 
point a district chairman, very much like the county assessor of 
Indiana and some other states, who supervises the communal 
boards within his district; one appoints two members of each 
local board, and another appoints a majority of the members ; 
one appoints the chairman of each board, intrusts the appoint- 
ment of two members to the district, and allows the commune to 
appoint the other two ; and one intrusts the whole work of assess- 
ment to district commissions appointed by the canton. The gen- 
eral results of cantonal supervision and control have been quite 
as good as those achieved by the tax commissions recently ap- 
pointed by various American states, though perhaps not so strik- 
ing, since the original conditions in Switzerland were generally 
better than in the United States, and the chance for improvement 
correspondingly less. 

My last topic is popular lawmaking in its application to tax 
legislation. By the initiative and referendum the tax laws of 
most cantons are directly under popular control, and in financial 
matters the referendum has been very widely employed. I speak 
with hesitation of this subject, and am not yet ready to express 
an opinion as to whether, on the whole, popular lawmaking has 
worked badly or well. Some things, however, are too clear for 
dispute, and will be questioned by no one acquainted with the 
facts. The chief result has been everywhere to make a change of 
the tax laws exceedingly difficult, since most proposals are cer- 
tain to be defeated. Laws imposing taxes on transportation com- 
panies, increasing the rates of the inheritance tax, or graduating 
more sharply the taxes on large fortunes or incomes are not 
infrequently accepted by the people, since the average voter 
knows that the result will be to increase some other fellow's 
taxes. But a general income tax affecting the mass of the voters, 
a reform needed to increase the effectiveness of the property tax, 
or a proposal to raise the rate of taxation in order to avoid re- 
curring deficits has about four chances in five of being rejected, 
and will be accepted only in cases of dire financial need. The 
introduction of property and income taxes during the last half 
of the nineteenth century was a work of the greatest difficulty, 
and the people of some cantons absolutely refused to accept a 



3;8 SELECTED READINGS IN PUBLIC FINANCE 

direct tax until their governments were on the road to bank- 
ruptcy. In Aargau the people bestowed upon themselves in 1870 
the right of fixing the rate of the direct state tax, and then pro- 
ceeded to fix it at zero. They were at length persuaded to divest 
themselves of this right, but they will not to-day consent to a 
slight increase in the rate of the state tax needed to meet a 
chronic deficit in the cantonal budget, and the canton has been 
obliged to borrow money in order to provide for accumulated 
deficits. Baselland had a somewhat similar experience, and se- 
cured the establishment of a state tax in 1892 only by reducing 
the rates of various indirect taxes and making certain concessions 
to the communes. The rates of taxation then authorized by the 
constitution have never been adequate, and the government to-day 
is at its wits' ends, since it knows well that it is useless to .propose 
an increase. St. Gall's experience is equally interesting. Her 
antiquated tax laws had brought the canton to a pass where 
amendment was absolutely necessary, but in 1900 the people re- 
jected a reform measure. Three years later, knowing that a new 
project would meet with a similar fate, the leaders of all parties 
agreed to enact a law and then endeavor to avoid a referendum. 
This was actually done, petitions for a referendum failing to 
receive the necessary number of signatures; but it is doubted by 
no one that if a referendum had been ordered, the new law, which 
has greatly improved the finances of the canton, would have been 
summarily rejected. Upon the other hand, it is clear that the 
difficulty of securing the adoption of new laws has made the 
cantonal governments extremely careful, and has tended to retard 
somewhat the increase of expenditures. In not a few cantons new 
laws have been accepted during the past ten or twelve years ; and 
some persons, in an excellent position to judge, are of the opinion 
that, with a iew conspicuous exceptions, the people have judged 
fairly w^ell concerning the necessity of proposed legislation. Upon 
the basis of my present studies I am unwilling to accept or reject 
this opinion. 

Concerning the taxation of property by the Swiss cantons, I 
submit, somewhat tentatively, the following conclusions. General 
conditions in Switzerland are more favorable than in the United 
States to the successful operation of direct taxation. There is 
less making of law, and very much more enforcement ; conse- 
quently, respect for law is undoubtedly greater than in our own 



THE GENERAL PROPERTY TAX 379 

country, and the enforcement of tax laws far less difficult. Then 
the business of cantons and communes alike is conducted with 
reasonable efficiency, great economy, and absolute honesty; so 
that taxpayers know that their money will be well expended, and 
therefore contribute more willingly. State and local taxation, 
besides being reduced in amount by revenues from other sources, 
is more diversified than in the United States; and the pressure 
of the property tax is relatively less severe. In many respects 
the tax laws of the cantons are open to serious criticism. Some 
of them are antiquated statutes which, under popular lawmaking, 
it seems impossible to change. In America such laws would 
break down from mere weight of years without the slightest 
assistance from taxpayers or courts. Yet in Switzerland, with 
lower tax rates, efficient administration, and more favorable 
general conditions, they frequently work better than the most 
up-to-date revenue code ever adopted by a newly organized 
American state. In taxing real property the average Swiss canton 
probably avoids such gross inequalities as frequently occur in the 
United States, but a few of our commonwealths and not a few 
cities manage quite as well as any of the Swiss cantons or com- 
munes. And finally, Swiss experience shows that, with good 
administration and a moderate rate of taxation, personal prop- 
erty can be taxed with reasonable success. It also demonstrates 
that the most Draconian laws and rigorous administration are 
powerless to reach the great mass of personalty when the tax 
rate exceeds the bounds of reason and moderation. In Switzer- 
land this fact finds general recognition ; if American states would 
take it to heart, they could speedily solve the most difficult 
problem in the whole realm of taxation. 



CHAPTER XII 

THE GENERAL INCOME TAX 

48. The Prussian Income Tax. — This tax has had an interest- 
ing history, since it has developed out of graduated capitation 
or class taxes which date back to 1821. In that year, in order 
to meet a deficit, the Prussian government established a class 
tax. This law grouped the population in four classes, accord- 
ing to social position ; and then imposed three different rates of 
taxation within each class in order to allow for differences of 
wealth between the members of the same social class. The 
result was a graduated capitation or class tax with twelve differ- 
ent rates. The new tax was believed to be " a happy compro- 
mise " between a uniform poll tax and an income tax which 
would have required "minute and vexatious inquiry into the 
financial condition of the taxpayer," It did not, however, apply 
to cities ; since in such places there already existed a grist and 
slaughter tax^ which was considered a satisfactory substitute. 
The class tax did not prove successful in reaching the larger 
incomes, and it was found that, in 1846, 45 per cent of its yield 
came from the lowest class and only 3|- per cent from the high- 
est. Accordingly in 185 1 it was supplemented by an income 
tax which, as amended at various times — notably in 1891, is 
now one of the chief branches of Prussian revenue. Dr. Joseph 
A. Hill gives the following account of the development of the 
income tax in Prussia since the reform of the class tax in 
1851:2 

1 The grist and slaughter tax had been tried in country districts, but had not 
proved satisfactory because it was difficult to enforce. 

^ Reprinted, with the consent of the author, from the Quarterly Journal oj 
Economics, VI, 212-221;. 

380 



THE GENERAL INCOME TAX 381 

The successful reform bill, which became law in 185 1, was 
of a still milder character.^ The grist and slaughter tax for 
the large cities was retained. The class tax, confined as be- 
fore to the smaller cities and country districts, was curtailed 
by the abolition of the highest class. For the three remaining 
classes, which were to include all taxpayers having incomes 
of not more than 1000 thalers, thirteen rates were prescribed, 
of which the highest was 24 thalers annually, while the lowest 
was, as before, J thaler. To replace the tax on the highest 
class, a classified income tax was adopted, to be assessed 
throughout the entire kingdom on all incomes of more than 
1000 thalers, with a rebate of 20 thalers in those cities which 
were subject to the grist and slaughter tax. The payers of this 
income tax were divided into thirty classes. In the lowest 
the annual rate was 30 thalers, in the highest 7200 thalers. 
These rates were graded with the intention of collecting 3 per 
cent of the minimum income in each class. This made the mini- 
mum for the highest class 240,000 thalers ; and the amount by 
which any income exceeded that limit was, therefore, not taxed. 
No declaration was required from the taxpayer, and the assess- 
ment was to be made without ** inquisitorial procedure." 

In the two previous attempts at reform the main end in 
view had been a more equitable distribution of the burden of 
taxation. There had been no expectation of any considerable 
increase of revenue. But, in framing the law of 185 1, the need 
of more revenue had been the principal consideration. Any 
sort of income tax which would meet this need was regarded 
as better than none. It cannot be denied, therefore, that " the 
Prussian income tax was introduced, not solely from a recog- 
nition of its social necessity, but at the same time on account of 
pressing financial needs." It is not strange, then, that the law 
did not fulfill the requirements of an equitable income tax. Its 
most serious defect was the retention of a maximum limit to 
the rates. Besides this the classification was not fine enough ; 
that is, the dividing limits between the classes were too far 
apart The result was a rather wide variation in the rate per 
cent of the tax ; for while, as we have seen, it was 3 per cent' 

^ Milder, that is, than a measure proposed in 1847, which the author had previ- 
ously described. — Ed. 



382 SELECTED READINGS IN PUBLIC FINANCE 

of the minimum income in each class, on the maximum income 
it was in most cases equivalent to only about 2J per cent. On 
the whole, it may be said that this reform, like the introduc- 
tion of the class tax in 1820, aimed principally at an increase 
in the public revenue, and obtained it by taxing the poor not 
less and the rich considerably more. 

The conditions under which the next reform was accomplished, 
in 1873, were more favorable, since at that time any increase of 
taxes was not necessary. On the contrary, the state, of the 
public finances was such — thanks to the French milliards — 
that the people felt justified in demanding some relief from 
taxation, and it was partly in response to this demand that the 
reform was undertaken. The grist and slaughter tax v/as 
repealed, to be replaced in those cities where it had existed by 
the class tax. The latter was now recognized as being, in fact, 
an income tax which was to be assessed " on the basis of the 
estimated value of the annual income." This was only a recog- 
nition of what had long been the case in actual practice. Indeed, 
the instructions for the assessment of the tax issued by the 
finance minister in 1867 had designated numerically certain 
incomes which were to be treated as Anhaltspuncte in assessing 
the several rates, and stated furthermore that the ** presumable 
income " of the taxpayer was to be regarded as " not indeed the 
sole determining factor in the assessment, but still the principal 
one." Other circumstances were also to be considered, whereas 
the income tax was assessed *' solely on the basis of income." 
This distinction between the two taxes was, on the whole, still 
maintained in the law of 1873, except as regards the two lowest 
classes of the income tax. 

The maximum income subject to the class tax remained, as 
before, 1000 thalers, or 3000 marks; but now for the first time 
the law also prescribed a minimum taxable income. The limit 
selected was 420 marks, all incomes below that being thus 
exempted from direct taxation. The intention apparently was 
to exempt all who had previously been assessed with the lowest 
tax (J thaler), which now disappeared from the scale of rates. ^ 
This, we may say, was the final disappearance of the one half 

1 In 1873, out of 9,300,000 persons assessed under the clf.ss and income tax, 
5,000,000 paid the one half thaler rate. The number actually exempted when the new 



THE GENERAL INCOME TAX 383 

thaler poll tax of 181 1. But, while the reform may have been 
prompted to some extent by the desire to relieve the poorer classes 
from the bttrden of taxation, apparently the difficulty and expense 
of collecting the tax from such classes, especially in the larger 
cities, where the class tax was now to be introduced, had the 
most to do with this new departure. But, in making the tax 
progressive, — or better, perhaps, degressive, — there was un- 
deniably the intention of favoring the poor. There were twelve 
rates, ranging from 3 marks to 72 marks ; and the equivalent 
rates per cent on the minimum income , of each class increased 
gradually from |- per cent in the lowest class to 2| in the high- 
est. The tax on the incomes at the lower end of the scale was 
reduced, while at the upper end it remained about as it was 
before. 

In the income tax the rates were, as before, equivalent to 
3 per cent of the minimum income of each class. But the num- 
ber of classes was increased, and, more important still, the 
maximum limit to the tax was removed. Incomes up to 780,000 
marks were rated in forty classes, and beyond that point the 
tax increased 1800 marks for every 60,000 marks' increase of 
income. The same line of reform was carried a step farther in 
the years 1880 to 1883. An increase of revenue, derived princi- 
pally from the imperial tariff and tobacco tax, — the proceeds of 
which, in excess of 130,000,000 marks, are divided among the 
states in the form of the so-called Ucberweisungen, — made a 
reduction of direct taxation possible, which, it was felt, should 
accrue to the benefit of the poorer classes. With this end in 
view, the two lowest rates of the class tax were abolished, thus 
exempting all incomes up to 900 marks, and the other rates were 
reduced, as well as the two lowest rates of the income tax, so 
that the principle of degressive taxation now applied to all 
incomes under 4200 marks. 

Such had been the development of the class and income tax 
down to the reforms of the present year. The law of June 
24, 1 89 1, like that of 1873, has been enacted under favorable 
financial conditions, which relieved the government from the 
necessity of asking for any increase of taxes ; and, while the 

law went into operation^ in 1 874, was 6,400,000. See Zeitschrift des preussischen 
statistischen Bureaus, Bd. 15 (1875), P- i^^. 



384 SELECTED READINGS IN PUBLIC FINANCE 

reform can hardly fail to make the tax more productive, a guar- 
antee has been given that any such result shall not accrue to the 
benefit of the pubHc treasury, but lead to a relief ^rom some 
other form of taxation or else to a reduction in the rates of the 
income tax itself. Thi§ time it was the net earnings from the 
state railroads, which, as Cohn says, made it possible to indulge 
in the luxury of distinguishing between a reform of the public 
finance and an increase of public revenue, — an indulgence 
which he seems to regard as very improvident, if not enervating. 

But, if fiscal motives be wholly wanting in the new law, — 
which, after all, there is some reason to doubt, — it only adds to 
the interest and significance of the reform, since, if the burden 
of taxation is to remain the same, but be more justly distributed, 
we may draw some inferences as to what ideals of just taxation 
find favor in Prussia at the present time, even if we must pre- 
mise that, as is usual in tax reforms, considerations of practical 
expediency have had quite as much weight as notions of abstract 
justice. 

The new law introduces important changes in the method of 
assessment, the classification, and the rates. The class tax is 
no longer retained, and the incomes on which it was formerly 
assessed are now properly included under the income tax ; but 
there is still a distinction as regards the method of assessment, 
since these incomes are, as before, to be estimated without, as a 
rule, requiring any declaration from the taxpayer, while for 
incomes above 3000 marks a declaration is required. This 
important reform, which has repeatedly been rejected by the 
Landtag, now encountered but little opposition,^ and is a signifi- 
cant departure from the principles on which the assessment has 
heretofore been conducted. The law of 1851 was very explicit 
in the assurance it gave the taxpayer that there should be no 
intrusion into his private business affairs. To be sure, the 
chairman of the board of assessors was to collect the fullest pos- 

^ The declaration had been a feature of the unsuccessful income and property 
tax of 18 1 2. It was strongly advocated by Stein and other leading statesmen of 
that period, but was rejected when the class tax of 1820 was adopted. It was 
rejected again in 1847, 1851, and 1869. In 1873 the government, although recog- 
nizing it as a desirable method of assessment, did not venture to propose it, feel- 
ing certain that the Landtag would not adopt it. See Anaalen des deutschen 
Reichs, 1874, p. 939. 



THE GENERAL INCOME TAX 385 

sible information in regard to the financial condition of the 
taxpayers, but only in so far as it could be done without a too- 
searching inquiryy —o/ine tieferes Eindringen. The other mem- 
bers of the board were to subject the chairman's results to a 
careful examination, in which they were to make use of all 
sources of information at their command. But here again all 
intrusive inquiry — jedes Idstige Eindringen — was to be avoided. 
Even when an appeal was made against the assessment, the 
proper tribunal must endeavor to get at the truth by the less 
rigorous method above described, before it exercised the right to 
institute a more thorough investigation and require definite state- 
ments from the appellant, summon witnesses, and so on. These 
provisions were not repealed or altered in 18730 The results of 
this method of assessment have proved very unsatisfactory. 
Outside of fixed salaries very few incomes have been assessed 
at their full value; and, as might be expected, the wealthier 
taxpayers were generally the ones who profited most by this 
leniency. Of course, from the nature of the case, any estimate 
of the extent of this undervaluation must be inaccurate. Yet it 
seems to be the general opinion in Prussia that, on the average, 
incomes have been rated at less than one half or even less than 
one third their true value ; and this means that in individual 
cases the undervaluation has been far greater.^ 

Hereafter the Prussian taxpayer must make out a written 
return of his income, if it exceeds 3000 marks, entering it under 
the following four heads: i. Income from invested capital; i.e., 
interest and dividends. 2. Income from real estate, — ans 
Grundvermogen, — whether derived from its use or its owner- 
ship or both. 3, Profits or the earnings from trades, industries, 
and mines. 4. Wages, salaries, professional earnings, or pen- 
sions, annuities, or other sources of periodical income not in- 
cluded under the first three heads. It is only necessary to give 
the lump sum under each head without any further specifica- 
tions. No oath is required, but simply an affirmation of the 
truth of the statement. These returns are subjected to the 
supervision of a county {Kreis) board of assessors, the majority 

1 See Annalen des deutschen Reichs, 1874, pp. 929 and 339; also Cohn, Die 
preussische Steuerreform, in Jahrbiicher fiir Nationalokonomie (1891), Bd. 56, 
p„ 31J and Delbriick, as quoted below. 



386 SELECTED READINGS IN PUBLIC FINANCE 

of whom are elected in the county or assessment district, while 
the minority, including the chairman, are appointed by the gov- 
ernment. If the taxpayer refuses to declare his income, he 
loses, in the first instance, the legal right of complaint or appeal 
against the official assessment ; and, in case of a second refusal, 
the assessment is increased 25 per cent. False declarations, 
willfully made, are punishable with heavy fines. In this way, 
it is expected to obtain approximately correct returns. Whether 
this expectation will be realized remains to be seen ; but there 
are good reasons to believe it will not, especially as this change 
is accompanied, as we shall see, by an increase in the rates on 
large incomes. In this connection, I may quote the opinion of 
Professor Delbriick of Berlin, expressed in the way of comment 
on a notorious case, which came up in the courts recently, 
where it was proved that a group of wealthy taxpayers had 
been assessed altogether too low : 

The Bochum tax case is seasoning for the new income tax law. The rich 
men in that place have almost all been assessed too low by half and two thirds, 
and to such a scandal as that, it is said, the declaration ought to and will put 
an end hereafter. " Ought to." Yes, but "will " as well? In the first place, 
I dare make the assertion that in the entire monarchy the case is the same 
as in Bochum. Select at random any city or county, subject it to the same 
test, and you will reach the same results. Without doubt the declaration will 
secure better returns than the previous method of assessment. For once we 
will venture to prophesy, and say that (apart from the new tax on corpora- 
tions and the higher rates) it will secure an increase of from 25 to 30 per cent. 
Had it not been for the Bochum case, we would have said 25 per cent ; but 
the alarm which this affair has occasioned may well help us to 30 per cent. 
But by how much was the assessment too low in the Bochum case? By one 
half to two thirds, and even more. This amount will not come to light even 
under the new system. ... So long as we have not reached an inheritance 
tax and a considerable reduction in the communal sur-taxes, the declaration 
will be of little benefit. The strictest control and a reasonable moderation in 
the rates, — without these two wheels it is impossible to set the wagon going. 
{Preussische Jahrbucher, July, 1891.) 

The assessment of incomes, then, in Prussia, has not been so 
very much better than that of personal property in America ; 
nor is it certain that the new law is going to solve the problem 
for the former country. Yet in Prussia there is an efficient and 
reliable civil service ; and the private citizen, moreover, is accus- 
tomed to submit to a good deal of investigation of his affairs on 



THE GENERAL INCOME TAX ^^y 

the part of the public authorities. All this renders the success 
of such a law more probable there than in America, where, 
indeed, the attempts already made in certain states to secure 
correct returns of personal property by means of declarations 
have proved wholly ineffectual. 

In grading the incomes, the new law has made the divisions 
much finer than before. There are now 75 grades or classes 
for incomes from 3000 up to 120,000 marks, while under the 
law of 1873 there were only 27, and before that 19. Beyond 
this point the increment of increase in the new classification is 
5000 marks, while in the old it was for a few grades 24,000 
marks, and finally mounted to 60,000. As a result of this 
change, it is now necessary to ascertain the taxpayer's income 
with an approach to accuracy which was not required before, 
and would at any rate be impossible without the declarations. 
Under the former classification the assessors, even though they 
were required to avoid jedes Idstige Eindringen, might perhaps 
decide with some confidence that a man's income was, for 
instance, somewhere between 60,000 and 72,000 marks. Any 
variation within these limits could be neglected, since it did not 
affect the rate. Under the new law, however, there are now 
seven classes within the same limits ; and it is necessary to 
decide whether, in the given case, the income is between 60,000 
and 62,000 marks, or between 62,000 and 64,000, and so on, 
thus implying a pretty exact knowledge of the financial situa- 
tion of the taxpayer, such as could hardly be obtained without 
his cooperation. Moreover, when once the income is ascer- 
tained, the new classification will have the effect of increasing 
the tax in most cases, for the reason that, under a classified 
income tax, the amount by which any income exceeds the mini- 
mum limit of the class in which it is rated is practically untaxed. 
The narrower the classes, therefore, the smaller these portions 
of untaxed income must be. 

Of especial importance are the changes which the law has 
made in the rates. Beginning with the lowest class, which 
includes incomes from 900 to 1050 marks, the tax is 6 marks, 
being equivalent to about .62 of i per cent of the mean income. 
This rate increases until it reaches 3 per cent on an income of 
10,000 marks, which, it will be remembered, was the uniform 



388 



SELECTED READINGS IN PUBLIC FINANCE 



rate per cent of the former income tax. In the ministerial bill 
the progression ceased at this point ; and thereafter the rate 
was uniformly 3 per cent of the mean income in each class. 
But the Lower House of the Landtag v^^as not content with 
this. Unlike its predecessor of 1847-51, it was more radical 
than the government, and in the bill as finally passed the 3 per 
cent rate is retained only on incomes between 10,000 and 
30,000 marks. Then the progression begins again, and con- 
tinues until the rate reaches 4 per cent on an income of 100,000 
marks. Thereafter this remains the uniform rate per cent 
estimated on the minimum income of each class; or, in other 
words, the tax increases 200 marks for every 5000 marks' 
increase of income.^ Speaking generally, then, the effect of 
the new law is to lower the tax on incomes under 10,000 marks 
and increase it on higher incomes. And even for incomes 
between 10,000 and 30,000 marks, where the rate is nominally, 
as before, 3 per cent, there is really an increase of taxation 
resulting : first, from the increase in the number of classes ; and, 
secondly, from the fact that the tax is now 3 per cent of the 
mean instead of the minimum income in each class. To illus- 
trate: under the old law an income between 14,400 and 16,800 
marks was rated in class 12 and assessed 432 marks; under the 
new law this income would be taxed as follows : 



Class 


Income 


Tax (= 3 PER CENT OF THE 
MEAN income) 


30 
31 

32 


13,500-14,500 
14,500-15,500 
15,500-16,500 
16,500-17,500 


420 

450 
480 



There is here, then, a slight reduction in the tax on incomes 
between 14,400 and 14,500 marks, but above that point the tax is 
more than it was under the old classification. 

In the assessment of small incomes, the Prussian law has 



1 It must not be forgotten that these rates by no means give the full amount of 
the income tax. The communal sur-taxes must be added to the state tax, and often 
have the effect of more than doubling the rates given above. 



THE GENERAL IiNCOME TAX 389 

always favored the taxpayer by granting a partial or complete 
abatement of his tax, if he had to support a large family, or 
contend with any special misfortunes or disadvantages such as 
serious cases of sickness, accident, fire, floods, or debt. This 
was a feature of the class tax of 185 1. The law of 1873 re- 
tained this feature, and introduced it for the two lowest grades 
of the income tax as well, so that all taxpayers whose incomes 
did not exceed 4200 marks were entitled to this special consider- 
ation, although under the income tax the reduction could not be 
carried farther than to the next lower rate. The law of 1891 
gives a still wider appHcation of this principle, by permitting a 
reduction of the tax to an extent not exceeding three grades on 
account of " any special economic conditions which seriously 
impair the efficiency (Leistwigsfdhigkeity of the taxpayer 
whose taxable income does not exceed 9500 marks. The exact 
nature of the special economic conditions is not more definitely 
described, but presumably the intention is to include such cases 
as were expressly mentioned in previous laws. The case of 
children in the family, however, is especially provided for ; and, 
while the reduction is confined to the incomes under 3000 
marks, — a return in this case to the limit of 185 1, — it is not as 
before simply permitted, but is required and definitely regulated 
by law, since for every dependent member of the family under 
fourteen years of age 50 marks must be deducted from the tax- 
able income of the head of the family. This of itself would not 
in every case produce a reduction of the tax; but the law 
further provides that, if there are three or more such members 
in the family, the tax itself must, at all events, be reduced by at 
least one grade. 

One other new feature in this law is the taxation of corpora- 
tions and stock companies, which must now pay the income 
tax on all dividends and net earnings above 3|- per cent of 
the capital paid in. The dividends are of course also included 
in the income of the stockholder, and, if he is a Prussian, are 
taxed as such. This results in the double taxation of the excess 
above 3|- per cent ; but in this way and to this extent the foreign 
stockholder is taxed once, which seems to have been regarded 
as a strong argument in support of this provision. The double 
taxation of the Prussian stockholder may, perhaps, be defended 



390 SELECTED READINGS IN PUBLIC FINANCE 

on the principle of the higher taxation of funded incomes, which, 
as we have seen, was a feature of the unsuccessful tax bill of 
1847; but the provision appears to be simply a compromise 
between the desire to tax the foreign stockholder and the 
opposition which might be made against taxing the Prussian 
stockholder twice on the full amount of his dividends. 

Thus the development of personal taxation in Prussia has 
resulted in the adoption of a partially progressive income tax. 
The general tendency of each reform may be more clearly seen, 
perhaps, if we indicate briefly the steps by which this result has 
been reached. 

1. A uniform poll tax, 181 1. 

2. A class tax, collecting somewhat more from the prosperous 
and not less from the poor, 1820-21. 

3. To supplement the class tax, an income tax with compara- 
tively few classes, a uniform rate, and a maximum limit, 
1851. 

4. Classification made finer, the maximum limit removed, and 
the class tax made practically an income tax, with a progressive 
rate, and the exemption of incomes up to 420 marks, 1873. 

5. Exemption of incomes up to 900 marks, reduction of the 
remaining rates of the class tax and of the two lowest rates of 
the income tax, 1881-83. 

6. The principle of progression extended to all incomes under 
100,000 marks, incomes under 10,000 marks taxed less than 
before, and higher incomes more ; a declaration of income by 
the taxpayer required, and a finer classification adopted, 1891. 

In connection with this resume it may be well to note that 
such progression as existed in the rates on small incomes previ- 
ous to this latest reform was probably not a true recognition of 
the progressive principle of taxation, but simply a reduction of 
the regular rate made in view of the fact that the indirect taxes 
collect proportionally more from the smaller incomes than from 
the larger, so that, when we consider the tax system as a whole, 
the aim was not progressive, but simply proportional taxation. 
Such a reduction from the normal or uniform rate German 
writers designate as degressive taxation. In the new law, how- 
ever, the progressive principle finds a distinct although partial 
application, since in collecting 4 per cent from incomes of 



THE GENERAL INCOME TAX 391 

100,000 marks or more and only 3 per cent or less from in- 
comes under 30,000 marks, it is manifestly the intention that the 
rich shall contribute, not simply more proportionally than the 
poor, but also more than men of moderate means. Strictly 
considered, then, this is not an extension of the progressive 
principle, but its introduction. ^ 

49. The British Income Tax. — Dr. Hill describes the work- 
ing of this tax as follows : ^ 

I. General Description 

The tax has had, in fact, a somewhat remarkable history. 
Originally adopted as a temporary resource, it has now been 
assessed for over fifty years without any interruption ; and 
although still, in form, a temporary tax, requiring for its con- 
tinuance an annual renewal by act of Parliament, it is, in all 
probability, as firmly established and as permanent as any part 
of the revenue system. The tax is, however, more than fifty 
years old if we date its age from its first appearance in the 
fiscal system of England. A tax on incomes was resorted to 
by William Pitt as far back as 1798, and the income tax in its 
present form was introduced in 1803. These were war taxes. 
At that period a direct tax on income could hardly have been 
levied by any government in a time of peace. But under the 
pressure of the heavy strain which the struggle with Napoleon 
was imposing upon the financial resources of England, it was 
accepted as a burdensome but justifiable demand upon the 
patriotism of the nation. When the Napoleonic wars termi- 
nated with the Battle of Waterloo and a permanent peace had 
been established under the Treaty of Vienna, the tax was at 
once discontinued. It was not resorted to again until 1842. 
In that year Sir Robert Peel revived it, partly to provide for a 
deficit in the budget and partly to enable him to make certain 

1 It may be noted that in the communal sur-taxes the progression has often been 
carried much farther and made much sharper than in the state tax. See Neumann, 
Einkommensteuer, pp. 112 et seq. 

2 Reprinted from The English Income Tax, by Dr. J. A. Hill, in Economic Studies 
of the American Economic Association, 1899. Reprinted with the consent of the 
author and the Association. 



392 SELECTED READINGS IN PUBLIC FINANCE 

reductions and reforms in the complicated system of protective 
import duties. It was expected that this revival would be only 
temporary, but it proved to be permanent. The government 
has never since found itself quite ready to part with this source 
of revenue, and the country, as represented by ParHament, has 
never insisted on being relieved from the impost; and so the 
income tax has been continued to the present day. It was 
many years, however, before the intention of ultimately dispens- 
ing with it was virtually abandoned. In 1853 Mr. Gladstone 
came before Parliament with a comprehensive and far-reaching 
financial programme which he confidently believed would place 
the government in a position to part with the income tax at the 
expiration of seven years ; and it is probable that this expecta- 
tion would have been realized and that the tax could and per- 
haps would have been given up at the end of that period, had 
it not been for the Crimean War. That unexpected event in- 
volved large expenditures which Mr. Gladstone had not antici- 
pated, and when the year i860 arrived he had no alternative 
but to ask for a renewal of the tax. Again, in 1874, when Mr. 
Gladstone felt constrained to dissolve Parliament and appeal to 
the country, he offered, in event of his return to office, to abolish 
the income tax. Mr. Gladstone's party, however, was defeated. 
But the election did not turn upon financial questions and could 
hardly be regarded as a popular verdict in favor of the income 
tax. Still the Disraeli ministry, which now came into office, 
naturally felt free to continue the tax and found it desirable to 
do so ; and since that time no prime minister has ever proposed 
to part with this convenient and productive source of revenue. 

In the earlier period of its history the tax was several times 
granted for a term of years. But ever since i860 it has been 
an annual impost, which would expire with the close of the 
fiscal year if it should not be renewed by Parliament. This 
annual renewal affords an opportunity to adjust the rate of the 
tax to the condition of the finances. If, for instance, the rev- 
enues are insufficient, the necessities of the government may be 
provided for by adding another penny to the rate. If there is 
an excess of revenue, the country can be relieved from unneces- 
sary taxation and the accumulation of idle funds in the treasury 
forestalled by taking off a penny. In this way the tax has re- 



THE GENERAL INCOME TAX 393 

peatedly proved to be a highly convenient resource, of which 
the chancellor of the exchequer has availed himself both when 
he was confronted with the prospect of a deficit and when he 
was in the more fortunate position of having a surplus at his 
disposal. Hence in the English budget the income tax has 
served as a sort of regulator or adjustable element by means of 
which a close correspondence between revenue and expenditure 
can readily be maintained. This explains why the rate has 
undergone such frequent changes. For a number of years 
after 184*2 the tax was kept at ^jd. in the pound, or a little 
less than 3 per cent. During the Crimean War it was increased 
to i6d. ; and since that period changes have been made every 
year or two. The lowest point was reached in 1875, the rate 
then being only 2a. in the pound. Since 1880 it has varied 
from ^d. to %a} 

From time to time changes have likewise been made in the 
exemptions and abatements which are granted to the possessors 
of small incomes. In recent years the range of these abatements 
has been very much extended, and in effect the tax has thereby 
been made progressive as regards incomes between £,\6o and 
;£700. Incomes under £^\6o are wholly exempt, and incomes 
above £>"joo bear the full rate of the tax without any relief or 
abatement.^ 

In other respects the tax has undergone hardly any changes 
of importance since it was first introduced. In its main features 
it is the same to-day that it was ninety years ago ; and even in 
details the changes have been comparatively few. The assess- 
ment is still for the most part regulated by the Act of 1842, and 
that Act is in turn a close reproduction, in form as well as sub- 
stance, of the Act of 1807. 

That the English income tax should have been in this way 
retained and perpetuated until it has become apparently a 

1 In order to meet the demands of the war in South Africa, the rate of the income 
tax was advanced to i^. in 1900, and then to i^. id. in 1901, and \s. 3^. in 1902. 
Under a rate of 8^. the yield of the tax was ;/^i8,8oo,ooo in 1899-1900. With the 
increased rates, its yield advanced to ;/^29,700,ooo in 1900-01 ; to ^^35,400,000 in 
1901-02; and to ;,^38, 700,000 in 1902-03. — Ed. 

'^ As Dr. Hill explains in a later chapter, which we cannot reproduce, the law 
now exempts all incomes of £i(iO or less. Then it grants abatements on incomes 
between £i(iO and ;!^700, the amount of the abatement decreasing as the size of the 



394 



SELECTED READINGS IN PUBLIC FINANCE 



permanent institution seems to establish a certain presumption 
in its favor. To be sure, in politics and finance, however it may 
be in the realm of nature, mere survival can hardly be said to 
constitute any very conclusive proof of fitness. Conservatism 
or other and perhaps worse influences may, as we know too well, 
perpetuate old institutions after they have become ill-adapted 
to changed conditions or even laden with abuses and injustice. 
The system of state and local taxation in the United States 
might be cited as a case in point. But there are no indications 
that the English income tax is thus becoming antiquated or that 
it contains such inequalities or defects as would justify a demand 
for its abolition or radical reform. Like most taxes, it has first 
and last given rise to complaint on the part of the taxpayers 
and to adverse criticism by statesmen, politicians, and writers 
on finance. Such criticism can by no means be dismissed as 
altogether unjustifiable. The tax has its defects, which would 
have to be taken into consideration were we to attempt to pass 
judgment on its general character and test its merits either 
by the standard of an ideal system or by comparison with other 
existing taxes, which, in turn, will be found to have other or 



income rises. The result is a certain progression in the rate of the tax up to incomes 
of £'joo, after which the rate becomes uniform. Dr. Hill gives the following 
table : 



Income 


Abatement 


Income Taxed 


Tax at M. 
IN THE Pound 


Rate per cent 
OF THE Tax 


£i6o (exempt) 










200 


;^i6o 


^40 


;^i.33 


0.66 


250 


160 


90 


3.00 


1.20 


300 


160 


140 


4.66 


1.55 


350 


160 


190 


6.33 


1.80 


400 


160 


240 


8.00 


2.00 


450 


150 


300 


10.00 


2.22 


500 


150 


350 


11.66 


2.33 


550 


120 


430 


14.33 


2.60 


600 


120 


480 


16.00 


2.66 


650 


70 


580 


19-33 


2.98 


700 


70 


630 


21.00 


3.00 


750 




750 


25.00 


Z-33>k 


800 




800 


26.66 


3.33} 



THE GENERAL INCOME TAX 395 

similar defects.' But however faulty or imperfect the tax may 
be, it has successfully withstood all criticism and opposition. 
Movements for its abolition or its reconstruction on different 
principles have, indeed, been set on foot, but they have not met 
with much support. Twice in the course of its history it has 
been made the subject of investigation by Parliamentary com- 
mittees, — once in 185 1 and again in 1861 ; but neither com- 
mittee reported in favor of making any changes, and for the 
last twenty-five years or more there has been Httle to encourage 
any expectation that the tax will be abolished or will undergo 
any fundamental revision. Apparently the income tax has come 
to stay and is generally accepted as a' justifiable and, on the 
whole, fairly satisfactory impost. 

This result is no doubt due to a variety of causes. The tax is, 
as we have seen, a highly convenient fiscal resource for the 
government. It is regularly productive of a large amount of 
revenue, and can be made to respond quickly to the needs of 
special emergencies. Taken in connection with the other por- 
tions of the Enghsh system of taxation, it conduces to a just 
distribution of the public burdens and carries out the generally 
accepted principle that taxes on articles of general consumption 
should be supplemented by direct taxes on property or income. 
Politically it occupies a strong position since, in its incidence, 
it is confined mainly to the wealthy or well-to-do classes, which 
constitute but a small proportion of the total population ; and 
consequently there will be little disposition on the part of the 
great majority of voters to join in any movement for its aboli- 
tion. But after all due allowances have been made for these 
factors, it will be found, I think, that the success of the tax in 
surviving the test of experience is in no small degree due to the 
method by which it is assessed and the manner in which the 
assessment is carried out through the agency of competent 
officials. Probably this as much as anything else explains why, 
notwithstanding the great changes which have taken place in 
economic and industrial conditions, and the effects which these 
changes have produced on the forms in which property is held 
and the way in which the income of society is produced and 
distributed, the income tax has continued to be assessed, pro- 
ducing apparently better results and giving rise, on the whole, 



396 SELECTED READINGS IN PUBLIC FINANCE 

to less complaint at the present time than it did in the earlier 
period of its history. 

II. The Five Schedules 

For the purposes of the assessment the different kinds of 
taxable income are classified under five different divisions or 
schedules : 

Schedule A covers the income arising from the ownership of 
land or houses. It includes the rental value of premises occu- 
pied by the owner as well as the rents received by the landlord 
from the tenant. 

Schedule B applies to the income from the use or occupation 
of land, i.e., the income received by the cultivator of the land, 
whether he is the owner or the tenant. 



Schedule C comprises the interest, annuities, or dividends 
payable in the United Kingdom on government securities, 
British, colonial, or foreign. 

Schedule D includes the income from trades, professions, and 
business, from colonial or foreign possessions, from the stock 
or bonds of colonial or foreign corporations, and from any 
other sources which are not specifically included in any other 
schedule. 

Schedule E consists of the salaries, annuities, or pensions 
received by the officers and employees of the state and of 
incorporated companies. 

This classification is not employed for the purpose of making 
any distinctions in the rates at which the different kinds of 
income are taxed. So far as the rate is concerned all income is 
treated alike. The distinctions relate to the manner in which 
the income is assessed. It would seem that those who framed 
this measure of taxation came to the conclusion that that process 
of assessment which was calculated to produce the best results 
when applied to one form of income could not, without more or 
less modification, be as advantageously applied to another. At 
any rate we find that the assessment is regulated by distinct 
rules for the different schedules, and that there is consequently 
considerable diversity in the process and the machinery by which 



THE GENERAL INCOME TAX 397 

the income is ascertained and taxed. So this classification may 
be regarded as having been devised with a view to adjusting the 
process of assessment to the kind of income to be assessed. The 
result is a complicated system. Simplicity has been sacrificed 
in order to secure this adaptation of the means to the end. 

In all this diversity, however, one underlying principle has 
been introduced and applied so far as practicable. It is the 
principle of assessing the sources of income. This constitutes 
the distinguishing feature of the English income tax. So far as 
practicable the income is assessed where it arises and the tax is 
collected by stoppage at the source. Thus the tax on the land- 
lord's income is assessed to and collected from the tenant, who 
then deducts it from the rent. In like manner the creditor's 
income is reached by an assessment upon the gross income or 
profits of the debtor, who deducts the tax from his interest pay- 
ments. The right to deduct the tax from rent or interest is 
conferred by statute, and any contract intended to abrogate it 
is void. The stockholder's income is reached by assessing the 
tax upon profits of the corporation, and thus producing a corre- 
sponding diminution in the dividends which he receives. The 
five schedules constitute a classification which has been prepared 
with a view to reaching the sources of income so far as possible. 
The diversity in the nature of the sources necessitates consid- 
erable diversity in the process and machinery by which this 
principle of assessment is applied. 

■7^ y^ ^ ^ ^ ^ T^ 

There are two important advantages which the English method 
of assessing income at the source possesses over an assessment 
upon individual incomes. In the first place the taxpayer is, as 
a rule, relieved from the necessity of disclosing for the purpose 
of taxation the exact amount of his income. He is required, 
to be sure, to disclose the gross amount which passes into his 
hands from certain specified sources ; but he need not distinguish 
what proportion of this is kis income, to be expended as he 
pleases, and what proportion he is required to pay over to other 
people ; nor need he reveal how much income he receives from 
other sources. It is only when he wishes to claim the exemp- 
tion or abatements which the law allows on individual incomes 
which come within certain specified limits that he is obliged to 



398 SELECTED READINGS IN PUBLIC FINANCE 

give a complete and exact statement of his income. Leaving 
such cases out of account, it will be found that under this system 
of taxation a resident of England will be called upon to declare 
the rental value of the house which he occupies or the farm 
which he cultivates ; he will likewise be required to declare the 
amount of income yielded by any business, trade, or occupation 
in which he may be engaged, and the amount received without 
deduction of the tax from any" foreign investments ; but he need 
not state how much of the sum so declared is absorbed by pay- 
ments of interest on personal debts or borrowed capital or by 
payments of rent ; and he need not reveal how much income 
he derives from the stock or bonds of domestic corporations, 
or from securities of the British government, or from lands or 
houses owned by him and leased to tenants. Consequently his 
aggregate net income may be a good deal more or it may be a 
good deal less than the sum which he is required to declare. 

The other advantage which the system possesses is found in 
the ease and certainty with which it reaches the income subject 
to taxation. It is obvious that the opportunities for evasion will 
be greatly diminished, or entirely removed, if the income can be 
taxed before it comes into the hands of the person who is 
entitled to enjoy it; or, if there is still sufficient opportunity for 
evasion, the inducement to take advantage of it may be lacking 
so far as the person who is held responsible for the tax and 
required to make a return of the income is concerned. Under 
this system of assessment there is, in fact, a large amount of 
income in regard to which evasion is impossible. This is the 
case with the income paid out of the revenues of the state which 
imposes the tax. In the English system the tax on public 
annuities and on dividends or interest on the public debt is 
simply deducted from these payments as they are made. In 
the same way the tax is withheld from the salaries and pensions 
paid in the public service. Hardly less certain is an assessment 
on the profits of corporations in reaching the incomes of the 
stockholders and bondholders.^ 

1 As Dr. Hill explains in a later chapter not reproduced here, corporations are 
required to deduct the tax from the dividends and interest paid to holders of their 
securities. Thus of the total yield of Schedule D about ope half, representing the 
taxes paid by corporations, is collected by methods that make evusion impossible. — ■ 
Ed. 



THE GENERAL INCOME TAX 399 



It is not possible, however, to apply this principle of assess- 
ment at the source of all kinds of income. In the first place 
the source may be inaccessible to the government imposing the 
tax. This is the case with the income from investments or pos- 
sessions in foreign countries or in other states. But while this 
income cannot be reached at its source, the attempt is made, 
under the English system, to reach some part of it on its way 
from source to destination by requiring any banker or agent in 
Great Britain who may be intrusted with the payment of inter- 
est or dividends on foreign securities to account for and pay the 
tax on the sums passing through his hands in this way. Again 
there is considerable income which may be said to remain 
where it arises, the source not being distinguishable from the 
destination. The ''first possessor" of it is also "the ultimate 
proprietor." This is generally true of the incomes obtained by 
the exercise of a trade, the practice of a profession, and the 
private, as distinguished from the corporate, management of 
business in general. It is also true of the income derived from 
the capital employed by the owner in his own profession or 
business ; and of the income represented by the rental value of 
land or houses in those cases in which the owner is also the 
occupier. 

As regards these descriptions of income, then, it is not pos- 
sible to distinguish for the purpose of taxation between source 
and destination. The assessment will have to be made upon 
the person who receives and enjoys the income and who will 
consequently profit by any evasion of the tax. But while in 
these cases the person on whom the tax is assessed is not with- 
out the inducement to evade it, he may, nevertheless, lack the 
opportunity. Whether evasion is possible and easy or not will 
depend upon circumstances and particularly upon the character 
of the income. The assessment of houses and lands in the 
locality where they are situated, or of the income which they 
represent, is always a comparatively simple matter, affording 
little chance for evasion whether the tax be levied upon the 
owner or the tenant ; and under the English system the assess- 
ment of the farmer's income is equally simple, because for the 
purpose of taxation the income is assumed to be equivalent to a 



400 SELECTED READINGS IN PUBLIC FINANCE 

certain proportion (one third as the law now stands) of the 
annual or rental value of the farm, so that ordinarily it is not 
necessary to undertake to ascertain the profits which the farmer 
actually obtains.^ Then, too, many of the moderate or smaller 
incomes earned in a trade, profession, or business can be 
estimated with so close an approach to accuracy that there is 
practically little chance for concealment. 

On the other , hand, there are many cases in which an accurate 
or adequate assessment is hardly possible without the assistance 
of information furnished by the person who possesses the 
income on which the tax is to be levied. Here both the induce- 
ment and the opportunity to evade some part of the tax are 
present and are, as it were, coincident, — the person who has 
the opportunity being the person who profits by the evasion. 
There is, in fact, considerable income which will hardly be dis- 
covered and taxed unless the recipient of it is honest enough to 
reveal it. This applies to the returns from foreign investments, 
where the tax has not been deducted by any agent, and must, 
therefore, be collected, if it is collected at all, from the investors 
themselves. In other cases the existence of the income may be 
obvious enough, but its amount cannot be accurately or perhaps 
even approximately estimated unless the assessors can avail 
themselves of the taxpayer's knowledge of his own affairs. 
This is, to a considerable extent, true of the larger professional 
and business incomes. 

The opportunity for evasion, then, which is, perhaps, the 
strongest objection that can be urged against the direct taxa- 
tion of income, has not been entirely eliminated under the 
Enghsh system, but its scope has been very much restricted. 
Probably more than four fifths of the tax collected is assessed in 
such a way or under such conditions that evasion is, broadly 
speaking, out of the question. This estimate includes all the 
tax assessed in Schedules A, B, C, and E, and more than half 
of that in Schedule D. But as for the remainder, it is assessed 
under conditions which do not wholly preclude the possibility and 
likelihood of more or less evasion, the income being of such a 

1 Since 1887 the farmer has had the option, however, of being assessed upon the 
profits actually received from his farm ; but he does not generally avail himself of 
this alternative, perhaps because it is not often for his advantage to do so. 



THE GENERAL INCOME TAX 401 

nature that the assessors are, to some extent, dependent upon 
the declarations which are required of interested taxpayers. 
Consequently, as regards this portion of the tax, the problems 
and difficulties which are involved in securing reliable declara- 
tions and making an adequate assessment are very much the 
same as those which arise in connection with the other and 
more usual form of income tax, which is assessed upon the aggre- 
gate net incomes of the individual taxpayers ; and it will be 
found, in fact, that the process and machinery of assessment 
employed in Schedule D would be equally applicable to a tax 
which was wholly assessed upon the individual owners of the 
taxable property or income. 

50. The Income Tax in the American Commonwealths. — Vari- 
ous American states have experimented with general or partial 
income taxes, and their experience has been summarized by 
Dr. D. O. Kinsman as follows : ^ 

We shall now give a brief resume before presenting our con- 
clusion. We cannot charge the commonwealths with slighting 
the income tax. Of the forty-five states, sixteen have made 
legislative provision for it, either in a general or special form ; 
of about one hundred constitutions passed by the states, thir- 
teen, representing eight states, have made special provision for 
its use ; and of some forty state tax commissions, which have 
been appointed by the different states, seven have treated it in 
their reports. 

The use of the income tax proper ^ began about 1840 and 
has continued to the present time. Its history has been marked 
by three periods of special activity: one from about 1840 to 

1 The Income Tax in the Commonwealths of the United States, no et seq. In 
Publications of the American Economic Association, Third Series, Vol. IV (1903). 
Reprinted with consent of the author and the Economic Association. 

2 In the seventeenth and eighteenth centuries most of the colonies levied, for 
longer or shorter times, a partial income tax on " faculty," trades, professions, or 
occupations. This was designed to supplement the tax on property, but was of little 
financial significance. In some cases, as in Massachusetts and South Carolina, it 
survived until the nineteenth century, and developed into an income tax. For the 
early history of colonial and state income taxes, see Kinsman, Income Tax, 1-16 ; 
Seligman, The Income Tax in American Colonies and States, in Political Science 
Quarterly, ]\xne, iSgs- — Ed. 



402 SELECTED READINGS IN PUBLIC FINANCE 

1850, during which decade six states introduced the tax; another 
from i860 to 1870, during which decade seven introduced it; 
and a third from about 1895 to the present, which has been 
marked by a revival of the movement. Of the sixteen states 
that have employed it, six are still using it — Massachusetts, 
Virginia, North Carolina, South Carolina, Louisiana, and 
Tennessee. 

Massachusetts has had the longest experience with the tax, 
extending from 1643 to the present time. South Carolina's 
experience began in 1701 and, with the exception of about 
thirty years, has extended to the present. Pennsylvania levied 
the tax from 1841 to 1871 ; Maryland, from 1842 to 1850; Vir- 
ginia, from 1843 to the present; Alabama, from 1843 to about 
1886; Florida, from 1845 to 1855 ; North Carolina, from 1849 to 
the present time. With but one exception the states introducing 
the tax between i860 and 1870 employed it for only very short 
periods. Missouri employed the tax from 1861 to 1866; Texas, 
from 1863 to 1868; Georgia, from 1863 to 1866; West Virginia, 
during 1863; Louisiana, the one exception, from 1865 to the 
present time; Kentucky, from 1867 to 1872; Delaware, from 
1869 to 1872. Tennessee tried the tax in 1883, but then, like 
Kentucky, only to a very limited extent. 

Two causes have led to the introduction of the income tax : 
the demand for greater justice in the distribution of the burdens 
of taxation, and the need of increased revenue. A third cause, 
a desire to regulate the business from which the income is 
derived, has operated in a few instances. The need of revenue 
was the dominant force leading to the introduction of the tax 
in the period between 1840 and 1850, and also in that between 
i860 and 1870. In the first period this need was due to the 
enormous state debts resulting from extensive internal improve- 
ments ; in the second period, to the heavy expenses incurred by 
the Civil War. It must be recognized, however, that the demo- 
cratic influences which were felt in almost every department 
of political life about 1840 had not a little influence on the move- 
ment during the earlier period. During the present period the 
demand for justice appears to be the dominant force, although 
in South Carolina, as we have seen, the financial need is having 
weight. 



THE GENERAL INCOME TAX 403 

The states employing the tax have spared neither time nor 
ingenuity in attempting so to frame the laws as to make the 
tax effective. Every possible method has been tried. The 
tax has been levied as a general income tax upon all forms of 
income, and as a special income tax upon one or more forms of 
income ; without regard to the source of the income and modified 
according to the source ; as an apportioned tax, and as a percent- 
age tax. The rate has been made proportional, progressive, 
and partly proportional and partly progressive. The exemp- 
tion has been a fixed sum applied to all income and a sum vary- 
ing with the form of income and with particular classes of 
individuals. The administration of the law has been under the 
direct supervision of the central government, and it has been 
left to the option of the local units. The tax has been employed 
strictly as a war measure, as a peace measure, and as both. 

Of all the states using the tax, six have levied it as a general 
income tax, affecting all forms of income — rent, interest, wages, 
and profits. These states are Massachusetts, South Carolina, 
Virginia, Alabama, North Carolina, and Texas. The scope of 
the tax in Massachusetts, however, has varied with the different 
local interpretations placed upon the law.^ The remaining ten 
states have each taxed some one or more of the four forms of 
income. All of them except Georgia, Tennessee, and Kentucky 
have taxed incomes from personal services, salaries being espe- 
cially mentioned ; seven of them, all except Florida, Tennessee, 
and Kentucky, have taxed profits. Five, Delaware, West Vir- 
ginia, Kentucky, Tennessee, and Missouri, have taxed interest. 
The rate of the tax has usually been proportional, although six 
of the states have made use of the progressive rate. 

An exemption has been very generally allowed, varying both 
in the different states and at different times in the same state. 
When a fixed sum has been allowed, it has been usually from 
^300 to $2500, ^500 and ^1000 being the most common amounts. 

1 Since 1873 the Massachusetts law has provided that "Income from an annuity, 
from ships and vessels engaged in the foreign carrying trade, and so much of the 
income from a profession, trade, or employment as exceeds the sum of two thousand 
dollars a year " shall be included in the assessment of personal property under the 
general property tax. Income derived from property already subject to taxation is 
not to be taxed. Cf. pp. 17-28 of Dr. Kinsman's monograph; also Report of the 
Massachusetts Tax Commission of 1897, pp. lo-ii. — Ed. 



404 SELECTED READINGS IN PUBLIC FINANCE 

The exemption at present allowed in South CaroUna is $2500. 
Many of the states have provided for special exemptions, such 
as the expenses of the business from which the income is de- 
rived and the incomes of particular classes of individuals, such 
as ministers of the gospel, state judges, and certain classes of 
laborers. 

The administration of the tax has been much the same in 
all the states. It has been assessed, as a rule, by the local 
assessors and collected by the local tax collectors. The laws 
have required that the tax should be levied by self-assessment, 
almost invariably under severe penalties for failure to comply. 

The revenue derived from the income tax has been insignifi- 
cantly small. For instance, Alabama in 1882, during the period 
of her most successful experience, received an income tax of 
only ;^22,ii6 out of a state tax of over ^600,000. In 1899 North 
Carolina's income tax amounted to only ^4399 out of a total tax 
of ;$723,307. Virginia in 1899 received only ^54,565 from this 
source, while her state tax amounted to ^2,132,368. South 
Carolina in 1898, while levying a state tax of about ;^ 1,000,000, 
received only ^5190 from her tax upon incomes. ^ 

The attitude of the state courts toward the income tax has 
been one of sympathy. In the few cases upon the subject 
brought before them they have upheld the tax. Had all forces 
been as active in support of the system as the state courts, the 
tax would undoubtedly have been a success. 

Of the thirteen state constitutions providing for the taxation 
of incomes, Texas has adopted three; one in 1845, a second in 
1869, and a third, still in force, in 1876. Louisiana has also 
adopted three constitutions making special provision for the 
tax; one in 1845, another in 1852, and a third in 1868. The 
constitutions of 1879 ^.nd of 1898 failed to make such a pro- 
vision. Virginia has provided for the tax since 185 1, the con- 
stitution of that year and also that of 1870, still in force, 
expressly allowing the tax. The next state to provide for the 

1 In the cities of Massachusetts it was ascertained in 1S96 that ^1,891,742,000 of 
property was assessed for taxation. Of this sum, only ^422,048,000 was personal 
property; and of this amount of personalty, only $3,880,000 was income. Of the 
32 cities, 1 1 reported no incomes assessed, Boston, Worcester, Can^.bridge, and other 
large cities being of this number. — Ed. 



THE GENERAL INCOME TAX 405 

tax in her consdtution was North Carolina in 1868. Tennessee, 
in her constitution of 1870, still in force, incorporated a similar 
provision. California did Hkewise in her constitution of 1879, 
now in operation. Kentucky followed in 1891, and South Caro- 
lina, the last of the states to make such provision, in 1895. 
******* 

A careful study of the history of the tax leads one to the 
conclusion that the failure has been due to the administration 
of the laws. This conclusion is borne out by both the admis- 
sions of the advocates and the assertions of the opponents of the 
tax, and is corroborated by the reports of tax commissions. 
The causes operating to produce this failure in administration 
appear to have been four : the laws themselves have been 
defective in the provisions for their own administration ; the 
officials have been lax in the enforcement of the laws ; the tax- 
payers have been persistent in evading them ; and the nature of 
some incomes has made them especially difficult to reach. The 
income tax laws thus far, failing to recognize the weakness of 
the average taxpayer, have allowed him to return his own in- 
come. Some argue that to employ any other method would be 
undemocratic and that public sentiment would never submit 
to it. However, although the public has always opposed any 
inquisitorial system, the opposition has been often due rather 
to the fear that it may attain the end sought than that it is 
counter to the spirit of democracy. Often the taxpayer has 
something he wishes to conceal and calls on the ** spirit of de- 
mocracy " to help him out. We have yet to learn of a plausible 
argument in support of the assertion that the income tax is 
more inquisitorial than other forms of direct taxation. The in- 
come tax has succeeded in nations quite as democratic as the 
United States. Other methods than self-assessment have been 
employed successfully, both by foreign nations and to a limited 
extent by some of our own states. The use of the method of 
self-assessment has been due, not to pubHc demands, but largely 
to the indifference of legislators. However, it is not to be 
condemned except that it furnishes the means by which the 
taxpayer, if he wishes to do so, may escape the tax. 

The laxness of the officials in the enforcement of the laws 
doubtless also has had much to do with the failure of the income 



406 SELECTED READINGS IN PUBLIC FINANCE 

tax. Although the laws have usually required the assessors to 
demand from each taxpayer a full statement of his income and 
to enforce their demand by a severe penalty, they have not only 
failed to do this, but in listing the individual's property have 
also entirely neglected his income or assessed it so low as to 
make the tax derived therefrom unimportant. Before we can 
hope for a successful taxation of incomes, officials must be faith- 
ful in the performance of their duty. 

The taxpayer also has contributed much to the failure of the 
income tax. Not only has he taken advantage of every oppor- 
tunity to escape it, but he has also exercised his ingenuity to 
contrive means of evading it. The taxpayer with an elastic con- 
science and a good opportunity has usually succeeded in escap- 
ing the tax upon such property as could be concealed. 

The nature of income is such as to make concealment com- 
paratively easy. Much income is received in such form as to 
make it quite impossible for any one except the recipient to 
know its amount, or at least to make more than a mere esti- 
mate, and even the recipient, in many instances, would find it 
quite impossible to be accurate. . . . 

As a result of our study we conclude that the state income tax 
has been a failure, due to the failure of administration, which, in 
turn, may be attributed to four causes : the method of self- 
assessment, the indifference of state officials, the persistent effort 
of the taxpayers to evade the tax, and the nature of the income. 
The tax cannot be successful so long as taxpayers desirous of 
evading taxation are given the right of self-assessment. Since 
all attempts to change the method of self-assessment have failed 
and the nature of industry iri the states is at present such as to 
make impossible the assessment of a general income tax at the 
source, we are forced to the conclusion that, even though no 
constitutional question should arise, failure will continue to ac- 
company the tax until our industrial system takes on such form 
as to make possible the use of some method other than self- 
assessment. 

51. The Wisconsin Income Tax: by Thomas S. Adams/ — 

The success of Wisconsin with her income-tax law of 191 1 is 
described in the following selection : 

"^ Reprinted from Political Science Qtcarterly^ Vol. XXVIII, pp. 569-585. 



THE GENERAL INCOME TAX 407 

For many years expert opinion in the United States has strongly 
condemned the state income tax. Despite the voice of authority, 
however, the legislature of Wisconsin passed an income-tax law 
in 191 1, which has since stood the test of two assessments. 

The Wisconsin income tax originated in an effort to find an 
equitable and efficient method of personal taxation. The opera- 
tion of the general property tax has been steadily transforming 
it into a real tax — a tax on things rather than on persons. This 
tendency was beHeved in Wisconsin to be not altogether salutary. 
The property of many persons of wealth is situated in jurisdic- 
tions other than those in which they reside. These people, it was 
thought, owe some fiscal allegiance to the jurisdiction in which 
their persons are protected and their children are educated. The 
tax on property did not meet the requirements of the situation and, 
after the necessary constitutional amendment had been secured, 
a graduated income tax was adopted as the most available supple- 
ment to the system previously in force. The law was approved in 
July, 191 1 , and went into effect the following year. The first assess- 
ment, therefore, was made in 1912, based upon incomes of 191 1. 

The W^isconsin law is applicable to persons living in Wisconsin, 
to business transacted there and to income derived from property 
within the state. Where the business is taxed in Wisconsin any 
partner or shareholder residing in Wisconsin is exempt in his 
personal return from income taxed directly to the partnership or 
corporation. The rates are progressive, rising in the case of 
individuals and partnerships from i per cent on the first $1000 
of taxable income to 6 per cent on taxable income over $12,000. 
For corporations the rate rises from 2 per cent on the first $1000 
of taxable income to 6 per cent on income over $6000. The in- 
comes of wife, husband, and children under eighteen years of age 
are grouped together and the following deductions are allowed : 
$800 for an individual, $1200 for man and wife and $200 addi- 
tional for each child entirely dependent upon the taxpayer for 
support. No deductions are provided for partnerships and 
corporations. Educational and benevolent institutions not con- 
ducted for pecuniary profit are exempt from the tax, as are in- 
surance companies and all those public utilities which pay taxes 
directly to the state government. The yield of the tax is, of 
course, greatly affected by this withdrawal of insurance com- 
panies, steam railways, street railways and all gas and power 



408 SELECTED READINGS IN PUBLIC FINANCE 

companies associated with street railways. Since the first assess- 
ment, banks and trust companies have likewise been exempted 
from the income tax. This exemption is due to the fact that the 
income of most of these corporations is given proper weight in 
fixing assessments under the ad valorem tax imposed by the state 
government. Moreover, in the case of practically all of these 
corporations, the personal-property tax would be sufi^icient to 
cancel the income tax. For it is provided by the statute that any 
personal-property tax may be used as an offset or credit against 
the income tax. Thus a man with an income tax of $ioo and a 
personal-property tax of $70 pays his personal-property tax and 
only $30 as income tax. It was found impracticable to make the 
income tax a complete substitute for the tax on personal prop- 
erty. On the passage of the income-tax law, however, all moneys 
and credits, household goods and farm machinery were exempted 
from taxation, thus leaving subject to the property tax only a 
few kinds of personal property, the most important of which are 
farm animals and the stock of merchants and manufacturers. 

The administration of the tax is highly centralized, the assess- 
ment of corporations being made by the tax commission, and the 
assessment of partnerships and individuals by assessors of in- 
comes appointed by the tax commission in accordance with civil- 
service requirements. But the income tax is still predominantly 
a local tax. The administration only is centralized. The state 
government gets only 10 per cent of the revenues collected and 
pays all expenses. Twenty per cent goes to the county govern- 
ment and 70 per cent to the town, city or village in which the 
tax is collected. 

The first assessment w^as completed in the autumn of 1912. It 
naturally aroused no little irritation, and the income-tax law was 
made the principal point of attack in the gubernatorial campaign 
v/hich followed. But the attack failed. Governor McGovern, 
who made it his chief issue, was reelected, and in the legislature 
of 1913 practically no effort was made to touch the income tax 
except to strengthen and improve it. The fiscal results of the 
first assessment may be briefly and rather baldly described as 
follows : (fl) The total income assessed amounted in round figures 
to $100,000,000 and the income tax to $3,472,880, of which tax 
68 per cent was assessed to corporations and 32 per cent to firms 
and individuals. The average tax rate upon corporations was 5.4 



THE GENERAL INCOME TAX 409 

per cent and upon individuals 1.96 per cent, (b) The tax was 
much more productive in urban than in rural districts, 42 per cent 
of the entire tax being assigned to Milwaukee alone. Compara- 
tively few farmers and laboring men were found to be subject to 
the tax, the exemption — which for man, wife and three children 
amounts to $1800 — relieving these classes almost entirely of 
income taxation. The tax is borne for the most part by the more 
prosperous business and professional elements of the city com- 
munities, (c) Of the $3,472,880 assessed in 1912, $1,628,318 had 
been paid into the public treasury at the end of the collection 
season, $411,863 remained due and collectible on delinquent rolls, 
and $1,432,700 had been offset or canceled by payments of the 
personal-property tax. The uncollected tax represents for the 
most part amounts which have been deliberately withheld by 
responsible companies pending judicial decision of a number of 
disputed points, (d) The cost of administering the tax in the 
first and probably most expensive year of its operation was 
$94,832. From this, however, should be subtracted at least 
$54,000, representing the equivalent of salaries previously paid 
to certain officers whose work has been taken over and better 
performed by the assessors of incomes. The net or real cost of 
the income tax was, therefore, in round figures, $40,000, making 
the tax one of the least expensive direct taxes anywhere collected. 



The greatest discovery of the Wisconsin income tax is the non- 
political assessor of incomes. The law requires assessors of in- 
come to be selected in accordance with civil-service requirements 
and without regard to political affiliation. Among the forty-one 
assessors of incomes there are Republicans, Democrats, Socialists 
and single-taxers. The highest salary paid is $3600 a year; the 
lowest $800; the average almost exactly $1200. The assessors 
are appointed and subject to dismissal by the tax commission. 
They serve for a term of three years. They have been strongly 
supported by the commission in their work and earnestly urged 
to a thorough enforcement of the law. They have responded in- 
telligently and not only have impressed the people of the state 
v/ith their tact and iirnfness but have convinced them that the 
law is to be enforced just as written. It is very largely their 



4IO SELECTED READINGS IN PUBLIC FINANCE 

work that has made the mcome tax a success. With the property 
tax they have wrought something in the nature of a revolution. 

Wisconsin had, from 1903 to 191 1, county officers known as 
supervisors of assessment, appointed by the various county 
boards and exercising a general supervision over local assess- 
ment work, which now as then is performed by locally elected 
assessors. The county supervisors, appointed by the county 
boards and dependent upon such boards for their retention, did 
not accomplish much. They were timid and for the most part 
ineffective. Placed upon a civil-service basis by the income-tax 
law and urged by the tax commission to a tactful but firm and 
vigorous enforcement of the law, they have in the last two years 
effected a remarkable improvement in the assessment of real and 
personal property. At considerable trouble the W^isconsin Tax 
Commission secures very trustworthy estimates of the ratio of 
assessed value to the true value of property. In 1910 property 
was assessed generally throughout the state at 61 per cent of its 
full value. The assessors of incomes had only a few months to 
work in 1911, but they raised this ratio to 65 per cent in that year 
and to 73 per cent in 1912. In 1913, although the complete 
figures are not available, it is practically certain that the ratio 
will be not less than 83 per cent. In many taxing districts 
throughout the state there is now for the first time on any wide 
scale a full-value assessment. Those who know how effectually 
a full-value assessment tends to equalize the individual assess- 
ments, and how difficult it is to get such assessments, will realize 
the importance of the step which has been taken. 

In a degree heretofore unknown the local assessors have called 
for assistance upon the expert agents employed by the state tax 
and railroad commissions. The appraisal of mines, of the ter- 
minal properties of railroads and of minor public utilities sub- 
ject to local assessment, as well as of the larger and more difficult 
forms of manufacturing business, is coming to be in increasing 
degree the joint work of local assessors and state experts. The 
county equalizations, i. e., the division of the county tax among 
the political subdivisions of the county, which calls for an assess- 
ment of all county property on the same basis, are now, in effect, 
being made by the assessors of incomes ; whereas a few years ago 
they were largely influenced by political considerations, sectional 
jealousies and guesswork. In this way the expert agencies of the 



THE GENERAL INCOME TAX 411 

state government are economically and efficiently brought to the 
aid of the local assessors. The state cooperates with the local 
assessor ; it does not supplant him. It is a system which, as it is 
perfected, may combine uniformity with elasticity ; which may 
start with the locally elected assessor and yet give proper scope 
to centralization and expert aid through the cooperation of the 
state commission. It avoids the defects both of excessive cen- 
tralization and excessive decentralization. For this result both 
the state commission and the income-tax law are to be credited. 
Theoretically it might have been secured in the absence of the 
income tax by making the supervisors of assessment state offi- 
cials. Practically, however, the stimulating rigors of the in- 
come tax were required to make the people see and feel that the 
greatest need of the tax system was a set of officers not de- 
pendent for the retention of their offices upon the favor of the 
people whom they assess. The appointment of a body of pro- 
tected tax officials marks a new epoch in the fiscal history of the 
state of Wisconsin, possibly in that of the United States. 

• 11 

Closely connected with the results stated above are a number 
of important conclusions, very difficult to prove, yet which are 
hardening gradually into tenacious convictions in the minds of 
those who have had to do with the administration of the income 
tax: 

(a) First of all is the feeling that the "protected assessor" 
is the most vital part of the whole tax system ; that with him all 
things — even general property taxes perhaps — are possible; and 
that without him all is chaos. 

(b) The income tax is as easy to administer as is a tax on real 
estate. This may sound revolutionary ; none the less it is be- 
lieved to be true. In the majority of cases a man's income is more 
easily determined and measured than is the value of his prop- 
erty, particularly if you secure his cooperation in the work of 
appraisal. Income is less tangible than property, but if we except 
farming properties and one or two allied classes of occupations 
the range of uncertainty in the measurement is usually less. In- 
come is measured after the transaction is consummated. The 
amount received, with the proper exemptions and deductions pro- 



412 SELECTED READINGS IN PUBLIC FINANCE 

vided by law, is the proper measure of the taxpayer's liability. 
What his real estate is worth, however, is a mere estimate — 
an estimate of estimates — really determined by estimating what 
other men will estimate to be its worth. Business property, 
moreover, must be valued as part of a going concern. The point 
under discussion is too large to be settled here. What is asserted 
with some confidence is that the intrinsic difficulty of computing 
or appraising income, as compared with the difficulty of apprais- 
ing capital value, has been grossly exaggerated, particularly 
when the cooperation of the taxpayer can be secured. 

(c) And in the great majority of instances his cooperation can 
be secured. The American taxpayer is the most maligned creature 
in all the annals of fiction. He has been compared, confused and 
used synonymously with the liar. As a matter of fact, when 
confronted with an equitable tax and a fearless assessor, he is 
amazingly honest. Corporations are included in this characteri- 
zation. The great majority, both of individuals and of business 
concerns, tell the truth. In the opinion of those who administer 
the Wisconsin income tax, about lo per cent will equivocate, twist 
the truth or flatly lie, according to their legal learning, their skill 
and daring. The rest, with a reasoiSble amount of prompting 
and supervision, will make fair returns and can be counted upon 
to lend their own knowledge and assistance towards the deter- 
mination of a fair assessment. It is the locally elected property 
assessor, bent on conciliating voters and on keeping his own 
underpaid job, who has demoralized the American property tax 
and made it in the past a byword for chicanery, inefficiency and 
inequality. 

(d) Equally misleading, if Wisconsin experience can be trusted, 
are the catch-phrases "self-assessment is poor assessment" and 
"don't tax anybody for anything that can move because it will 
move." It is true, of course, that a tax which is left completely 
to the taxpayer for assessment will be "left" there. There is, 
however, no truth in the contention that the taxpayer cannot be 
made and ought not to be made to cooperate in the fixing of his 
own assessment. It is equally untrue that taxes should be levied 
only on those tangible things which the assessor can see and 
appraise without the help of the owner or taxpayer. The tax- 
payer usually knows better than does any one else the amount of 
his income and the value of his property. Nearly always he has 



THE GENERAL INCOME TAX 413 

in his possession data by which these questions can be deter- 
mined. In the past far too little use has been made of the tax- 
payer and the facts which he can contribute. This is true of 
Wisconsin at least. The income tax has opened the eyes of the 
Wisconsin authorities not only to the honesty of the average 
taxpayer, but to the extent to which he can be depended upon, 
if properly approached and supervised, to assist in appraising his 
own property or income. The declaration of the taxpayer is the 
most natural, effective and helpful starting point in the adminis- 
tration of any direct tax. It could be used with great advantage 
in the assessment of real estate, if taxpayers were convinced in 
advance that there was going to be a full assessment of all prop- 
erty on the same basis. 

The single-tax catchword with regard to the "moving" effect 
of taxes seems, in the light of Wisconsin's experience, particu- 
larly untrue. Discriminatory taxes may drive business away and 
excessive taxes may have the same result ; but reasonable taxes, 
imposed and administered in a spirit of equity, move almost no 
property or business and few people, beyond a small number of 
curmudgeons for whose absence any community would breathe 
more freely. In the heated^olitical campaign which followed the 
first assessment of the income tax, the statement was freely made 
that business enterprises were leaving the state on account of 
the income tax. Diligent effort was made to ascertain the facts, 
but not a single instance was found in which an industry had left 
the state on account of the income tax, or had failed to locate in 
W^isconsin because of the tax. It was discovered that in several 
instances the income tax had been considered by prospective in- 
vestors and in one case that the income tax, along with other 
factors, had deterred a group of investors from making one use 
of a water power in the state which was, however, later employed 
for another purpose. In short, the income tax exercised prac- 
tically no appreciable effect upon the location of industry. Taxes 
are ordinarily a minor element in the decision of this question. 
Whether in the long run industry will be appreciably affected by 
the imposition of income taxes in the state can, of course, be 
determined only by a longer experience ; but the people of Wis- 
consin will probably be little influenced in selecting their system 
of taxation by apprehensions which in the past have been so 
skillfully played upon by certain classes of interested taxpayers. 



414 SELECTED READINGS IN PUBLIC FINANCE 

The natural wealth of the state cannot run away, and the indus- 
try which cannot or will not stand fair taxes is in the long run a 
source of weakness, not of strength. The political atmosphere 
will be more wholesome and the general level of welfare and of 
real wealth will be higher for the absence of industries which 
are unwilling to contribute when their earnings are high. 

Ill 

It has been said by an able critic of state income taxation that 
no income tax can succeed among English-speaking people which 
does not make extensive use of collection at source, and that col- 
lection at source is not possible with a state income tax. If by 
''collection at source" is meant collection direct from corpora- 
tions, joint-stock companies and copartnerships, then the Wis- 
consin income tax makes considerable use of it, inasmuch as 68 
per cent of the entire tax was assessed to corporations alone, 
and to corporations and copartnerships more than 75 per cent. 
Moreover, the Wisconsin tax provides for the extensive collection 
of information at source. What is outgo to taxpayer A is in- 
come to taxpayer B. With respect to wages, salaries, rents and 
interest paid out, all taxpayers are required to list the names and 
addresses of the payees, and the income-tax returns of the latter 
are checked to ascertain whether the corresponding income has 
been properly reported. This device has proved exceedingly help- 
ful and has gone far to negative the criticism that in state income 
taxes proper use could not be made of collection at source. 

The Wisconsin authorities have, of course, no way of measur- 
ing the exact amount of interest and dividends from foreign cor- 
porations or other extra-state sources which is received and not 
reported by Wisconsin residents. But all indications point to the 
conclusion that this kind of evasion is not at all serious. In- 
formation about the receipt of such income is constantly being 
received from various quarters, and upon checking the returns 
of the recipients in question they have almost without exception 
been found to be correct. In short, most of the income of the 
people of Wisconsin is received from sources within the state, 
and the remainder is adequately known through the common 
honesty of the average citizen. Collection at source is a con- 
venience and an added element of strength. It is not a necessity, 



THE GENERAL INCOME TAX 415 

and critics who have built destructive arguments upon the alleged 
impossibility of incorporating the device in state income taxation 
should have learned as much from experience on the continent of 
Europe. 

IV 

A real difficulty has been encountered in the proper assess- 
ment of business concerns transacting business within and with- 
out the state. The amended law on this subject provides: 

In determining taxable income, rentals, royalties, and gains or profits 
from the operation of any mine, farm or quarry, shall follow the situs 
of the property from which derived, and income from personal service 
and from land contracts, mortgages, stocks, bonds and securities shall 
follow the residence of the recipient. . . . With respect to other income 
persons engaged in business within and without the state shall be taxed 
only upon such income as is derived from business transacted and 
property located within the state. 

The definite allocation of certain sorts of income to the juris- 
diction in which the property is situated or in which the company 
has its place of business considerably narrows the problem in 
question. Furthermore, in a large number of the remaining 
industries, a separate accounting for the Wisconsin business may 
be accurately and naturally made. In the latter case the problem 
is simple. But there remains a considerable number of important 
industries in which Wisconsin's share of the net income must be 
computed by a process of general apportionment which is at times 
both intricate and perplexing. Fortunately the task has been 
lightened by the fairness and cooperative spirit displayed by the 
great majority of the business concerns involved, most of which 
are corporations.^ And as each case is taken up and thoroughly 
threshed out, the problem shrinks, because when a definite status 
is once reached, it will usually serve for many years. The task of 
dividing or apportioning the income of companies engaged in 
business within and without the state is therefore one of the real 
difficulties of a state income tax ; but the problem presented by 

1 Either the great majority of corporations have been greatly maligned in the 
past or the corporate spirit and point of view have been wholly transformed in 
the last few years. Intimate contact with many large corporations makes one an 
optimist on the question of present-day business morality. 



41 6 SELECTED READINGS IN PUBLIC FINANCE 

this difficulty is not a major one, and with proper administrative 
effort tends to become less irritating and formidable with each 
successive assessment. 

Closely related to the foregoing is the problem created by the 
distributing or trading subsidiaries of the great industrial cor- 
porations. Almost every important American corporation to-day 
controls a subsidiary which takes out the licenses in states other 
than that in which the parent company is incorporated. The 
subsidiary is almost always capitalized at a very low figure in 
order that the licenses or foreign corporation fees, whose amounts 
are usually based upon capital stock, may be as low as possible. 
These subsidiaries usually act as the selling or distributing 
branches of the parent corporation; and the relation between 
parent and child is often of the most artificial kind. In most 
cases, though with some important exceptions, products are 
turned over to the subsidiary at prices high enough to assign all 
the real profit to the parent concern. 

This practice creates a real and trying problem which the state 
income tax must solve. It has not, however, proved a serious 
impediment in Wisconsin. The cases are not numerous. The 
relations between manufacturing and distributing departments of 
corporations are in some instances so natural and fair that the 
reported net income of the subsidiary represents exactly what 
the state seeks to tax. Again, in most of the cases in which the 
relationship is wholly artificial, the corporations have acknowl- 
edged this fact without dispute and have acquiesced in the fusion 
of the two concerns for purposes of income taxation. Finally, 
Wisconsin has its fair share of such parent corporations, and in 
these cases the shoe pinches the other foot. Such instances simply 
accelerate the willingness of the corporations concerned to dis- 
card legal fictions in favor of the underlying economic facts. The 
evil possibilities of the "trading subsidiary" are great, but they 
are as yet — from the standpoint of state income taxation — 
mostly possibilities, and will probably never prove to be beyond 
the control of state taxing authorities. 

A related legal problem should be considered at this point, not 
because it has up to the present time created any real difficulty 
in Wisconsin, but because of its sinister possibilities. The prob- 
lem includes the ascertainment of what income nay properly be 
said to be derived from interstate commerce, and the question 



THE GENERAL INCOME TAX 417 

whether the state may tax such income or may impose a tax in 
accordance with or in respect to it. 

Owing to the exemption of railroads and other public utilities 
from the income tax, the most obvious applications of this prob- 
lem do not arise in Wisconsin ; and it has up to the present time 
given very little trouble. But let us suppose the case of a Wis- 
consin factory whose products are all sold in other states. Many 
lawyers regard such sales as interstate commerce and hold that 
the state may neither tax the income derived from them nor 
impose a tax with respect to or measured by such income. Similar 
cases are now before the courts, but, tempting as would be the 
discussion of the interesting doctrines involved, it would be un- 
profitable to discuss the point now. But if the states are deprived 
by the federal law of the power to impose taxes on residents 
measured by income derived from sales to residents of other 
states, it will seriously cripple and perhaps wholly emasculate the 
state income tax. 



More important than the difficulties discussed in the preceding 
paragraphs, because more numerous and more general, are the 
questions concerning depreciation, amortization, depletion and 
losses which occur perhaps in the majority of income-tax returns. 
These questions, all of which are necessarily involved in the 
proper definition or determination of net income, constitute 
the very stuff of which the real problem of income taxation is 
made. To discuss them adequately here would be impossible. 
But a general verdict concerning them can be announced with 
some confidence. They present serious problems, irritating to 
taxpayers and involving an endless amount of supervision 
on the part of assessors. The items are essentially intangible. 
Their determination is wholly dependent upon human judg- 
ment. No solution can be "absolutely right" or "absolutely 
exact." 

Serious as are these difficulties, they are far from sufficient in 
the aggregate to destroy the usefulness of the income tax or even 
seriously to embarrass its operation, provided of course the tax 
is administered by conscientious and industrious men. They are 
inherent as well in direct ad valorem taxation. They are not fatal 
to the success of the income tax; first, because the margin of 



41 8 SELECTED READINGS IN PUBLIC FINANCE 

possible difference in varying estimates, while important, is re- 
stricted in range. Secondly, the difficulties diminish with each 
successive assessment. Questions of depreciation and losses are 
always greater the first year an income tax operates than they are 
thereafter. Old accounts may have accumulated or insufficient 
depreciation have been written off in the past, and the income 
tax affords an inducement to inaugurate a more stringent policy 
and to write off claims or properties that should have been taken 
care of years before. Fortunately in one sense, the difficulties as 
frequently relate to when the depreciation or loss may properly be 
claimed as to the amount of such depreciation or loss. If the 
claim is disallowed by the taxing authorities one year, it may 
properly be brought up again when the evidence is stronger. If 
allowed in one year, the claim is finally disposed of and usually 
does not arise again. The element of continuity or compensation 
in income taxation — the possibility of readjustment and cor- 
rection in subsequent years — is one which places the income 
tax in a position of decided superiority over the property tax. 
Thirdly, there are natural checks on these deductions, particu^ 
larly in the case of depreciation. A corporation has to make 
reports, to its stockholders, to the banks, to the insurance com- 
panies, which must harmonize with its reports to the assessor. 
This operates to keep such claims within proper limits. Finally, 
the element of compensation referred to makes it possible and 
equitable to dispose of many of these questions by general rules. 
The depreciation on a certain type of machine, for instance, may 
be fixed by a general rule at 12^ per cent a year, suggesting on 
the straight-line basis a life of eight. years. Suppose the machine 
actually has to be replaced in seven years. The balance of the 
cost not written off may be taken care of properly at the end of 
the period. Per contra, the life of a mine may be underestimated 
and the depletion allowance be completed before the mine is 
really exhausted. If so, the depletion allowance simply stops and 
the state assesses the whole net profit at the end of the period — 
a consummation not so exact or satisfactory as it should be, but 
still reasonably satisfactory. 

The difficulty of computing net income is at its worst, perhaps, 
with farmers, most of whom have some income in kind or prod- 
uce which is theoretically taxable, and most of whom take a 
large part of their earnings or compensation in a very real but 



THE GENERAL INCOME TAX 419 

exceedingly intangible appreciation in the value of their farms. 
This is a real but in many respects a minor obstacle to the satis- 
factory operation of the income tax; first, because with the 
exemptions provided in the Wisconsin act — and they are not 
excessive— few farmers would be subject to any tax, even though 
their -accounts were kept with absolute accuracy ; and second, 
because almost all the income tax goes back to the political sub- 
division in which it is collected. If a rural town, therefore, has 
no taxable income within its borders it gets little benefit from 
the income tax. Seventy per cent of the proceeds of the tax go 
to the local district, and the 20 per cent which goes to the county 
comes back to the local subdivisions, to a large degree, in the 
form of reduced county taxes. The rural district benefits slightly 
by the 20 per cent which goes to the county. It contributes less 
to this quota than it receives in the reduced county tax on prop- 
erty; but the difference is slight and is probably not unjust, be- 
cause, after all, the greater share of tax-paying ability is found 
in the cities. This is particularly true of that form of personal 
ability which the income tax is specifically designed to reach. 
Moreover, under the personal-property tax the ratio of assessed 
to true value is higher in the country than the city districts ; and 
real estate, which is relatively well taxed everywhere, consti- 
tutes a much larger share of the total wealth of the farmer than 
of the city man. While it is true, therefore, that the income tax 
works better in the city than in the country, it is also true that 
the defect is a small one and is counterbalanced by defects of the 
property tax working in the other direction. The two taxes are 
mutually corrective. 

VI 

The insignificant yield of the income tax in rural districts 
raises sharply the question whether or not the income tax has 
proved a successful substitute for the personal-property tax. No 
categorical answer to this question can be given. The income 
tax produced in the first year several times as much as the 
revenue formerly collected from the important classes of per- 
sonalty exempted when the income tax took effect. In the larger 
cities, moreover, the income tax produced enough to warrant the 
immediate exemption of all personal property from taxation. On 
the other hand^ in the smaller cities, villages and rural townships 



420 SELECTED READINGS IN PUBLIC FINANCE 

the yield of the income tax is, except where there are important 
mines or factories, almost negligible. 

In farming districts at the present time personal property 
represents only about lo per cent of the total assessment, and 
the yield of the income tax is small. In the villages and smaller 
cities personal property constitutes about 30 per cent of the 
entire assessment, and the revenue from the income tax is 
again insignificant. In the larger cities, however, while per- 
sonal property constitutes from 25 to 30 per cent of the total 
assessment, the yield of the income tax is large. From this state- 
ment it is apparent that the personal-property tax might be 
abandoned without any substitute in the farming districts, and 
that the income tax would fill the place of the exempted personal- 
property tax in the larger cities ; but in many of the town's, vil- 
lages and smaller cities, probably in most of them, the abolition 
of the personal-property tax would cause a decided increase in 
the tax rate on real estate. Unfortunately, also, the very places 
in which the personal-property tax is most important and the 
income tax least important are those places in which land values 
are least affected by the influences which give rise to the so-called 
"unearned increment." In these jurisdictions real estate is least 
able to bear the entire burden of taxation. 

The Wisconsin Tax Commission has twice recommended to 
the legislature the abolition of the personal-property tax; and 
the legislature in retaining the tax on merchants' and manu- 
facturers' stock, farm animals and other forms of tangible per- 
sonal property, was influenced not by any desire to preserve the 
personal-property tax but by prudent resolution to test out the 
income tax before relinquishing present sources of revenue. In 
the writer's opinion this action of the legislature was wise ; and 
it will probably be many years before the personal-property tax 
can be entirely abolished in Wisconsin. Under the circumstances 
it seemed to be the wisest alternative to make provision for such 
elasticity in the tax system as would permit some localities to do 
away with the personal-property tax, allowing other jurisdictions, 
which find its abolition impracticable, to retain it. Accordingly, 
there was introduced in 191 3 and passed in both houses of the 
legislature an amendment to the constitution of Wisconsin 
sanctioning a scheme of limited local option. 

The proposed amendment, which must pass another session of 



THE GENERAL INCOME TAX 421 

the legislature and then be ratified by popular vote before it 
can become effective, is quoted below. It will be noted that it 
does not give the local governments power to exempt property 
from county and state taxation, but leaves each jurisdiction in 
limited control of its own taxes — the state to say what forms of 
property shall be subject to the state tax, the county to deter- 
mine what forms of property shall be subject to the county tax, 
and the town or city to decide what forms of property shall be 
subject to local taxation. This is really home rule. The trouble 
with many home-rule amendments introduced in the past is that 
they have proposed to permit the smaller unit to dictate the policy 
of the larger unit by authorizing local subdivisions to exempt 
property from all kinds of taxes — state, county and local. The 
proposed amendment is as follows : 

The legislature shall have power to authorize counties, towns, cities and 
villages, by a vote of the electors therein, to exempt from taxation, in 
whole or in part, designated classes of property; but the value of such 
property exempted by any county shall be included in the assessment and 
equalization for state taxes, and the value of such property exempted by 
any town, city or village, shall be included in the assessment and equaliza- 
tion for state and county taxes. 

If this amendment passes, Wisconsin will have reached the 
principal goal toward which the income tax constitutes the first 
and most important step. It is not believed that the introduction 
of the federal income tax will seriously interfere with state in- 
come taxation. Why should it ? The federal income tax replaces 
regressive customs taxes, and the state income tax replaces de- 
fective property taxes. No new burden is created. The old 
burden is simply redistributed from the shoulders of those less 
able to pay over to the shoulders of those more able to pay. The 
individual who has no income above the minimum of subsistence 
and the business concern which makes no profit are not called 
upon to pay the income tax. Within reasonable limits it would 
seem that we could hardly move too fast in this direction of 
relieving from taxation consumption, property and business, as 
such, and placing an equivalent burden upon the successful 
people and business concerns of the community. And there is 
every reason to believe that the two taxes will be mutually help- 
ful from an administrative standpoint. In Wisconsin the income- 



422 SELECTED READINGS IN PUBLIC FINANCE 

tax rolls are public records — and incidentally it may be said 
that they attract little attention and produce none of the awful 
consequences so often predicted. The federal officials will find 
the state income-tax rolls of material assistance in their work. 
As a return courtesy the corporation assessments of the federal 
government will be thrown open to the properly accredited offi- 
cers of any state government imposing a general income tax.^ 
This is the beginning of a fruitful cooperation between state and 
federal governments which when consummated v/ill vastly im- 
prove our system of commonwealth taxation. 

52. Federal Taxation of Incomes (1861-1872).— Our federal 
government prior to 1913 had made two attempts to tax incomes : 
the first during the Civil War, the second in 1894. The income tax 
of the Civil War was established in 1861 and was discontinued in 
1872. Its history is outlined by Dr. F. C. Howe, as follows :^ 

By the provisions of the measure, a tax of 3 per cent was 
imposed on all incomes in excess of $800, from whatever source 
derived, save that upon any income derived from United States 
securities i^ per cent should be levied. Upon the incomes, 
dividends, or rents accruing upon any property or securities in 
the United States, but held by citizens resident abroad, there was 
to be charged a discriminating tax of 5 per cent, save upon so 
much of the income as was derived from federal securities. The tax 
was assessable on the first of January ; and in computing income, 
all national, state, and local taxes were to be first deducted. The 
duty was self-assessed upon schedules prepared for the purpose, 
and was based upon receipts for the preceding year, irrespective 
of their source. In case of failure on the part of the taxable to 
make such return, the assessor was empowered to estimate the 
income, and to add thereto 10 per cent as a penalty for the default. 

1 The new income-tax act contains, in paragraph D of section g, the following 
provision : " Provided further, that the proper officers of any state imposing a 
general income tax may, upon the request of the governor thereof, have access to 
said returns or to an abstract thereof, showing the name and income of any such 
corporation, joint stock company, association or insurance company, at such times 
and in such manner as the Secretary of the Treasury may prescribe." 

2 F. C. Howe, Taxation in the United States under the Internal Revenue 
System, 90-102 (New York, T. Y. Crowell and Company, 1896). Reprinted with 
consent of the author and by special arrangement with the publishers. 



THE GENERAL INCOME TAX 423 

The tax was assessed but once under this measure, when Con- 
gress, reassembling again in regular session, passed modifications 
which substantially repealed its provisions. By these alterations 
the exemption was reduced from $800 to $600; the rates were 
rendered slightly progressive, incomes above |6oo and below 
$10,000 paying 3 per cent on the excess above the former sum, 
those above the latter sum paying 5 per cent. The rates upon 
incomes from special sources remained unchanged. In order that 
the tax might be relieved of the objectionable feature by which 
publicity was given to incomes, collectors were instructed by the 
commissioner that returns of incomes should not be open to 
inspection by the public, a ruling which laid the tax open to all 
sorts of evasions, and subsequently induced its reversal by the 
commissioner. 

These rates remained in force for two years, when, in response 
to the recommendations of the commissioner, and the absorbing 
demand for revenues, the comprehensive measure of June 30, 
1864, was passed, by which the duties were considerably in- 
creased, and the rates rendered more strongly progressive. By 
this act incomes between $600 and S5000 were taxed at the rate 
of 5 per cent, those from $5000 to $10,000 at 7^ per cent, while 
all incomes in excess of the latter sum were rendered dutiable 
at the uniform rate of 10 per cent. The act further provided 
that any revenues derived from United States securities should 
be included in estimating incomes under the section, and that any 
net profits realized from sales of land were to be returned as 
income, while any losses incurred in the same way were to be 
deducted. In a like manner the householder was permitted to 
deduct the annual rental value of his homestead, whether occu- 
pied as tenant from another, or held in his own right. The 
measure specified with great precision the methods for the com- 
putation of annual gains, and required the assessor to secure from 
each taxable an itemized account of his revenue for the preceding 
year. In the case of the farmer the requirement was extremely 
burdensome ; for it demanded a minute return of all "incomes and 
gains derived from the increased value of live stock, whether sold 
or on hand, and the amount of sugar, wool, butter, cheese, pork, 
beef, mutton, or other meats, hay, grain, or other productions of 
the estate of such person sold." Such demands were somewhat 
onerous upon the citizen inclined to make an honest return ; while, 



424 SELECTED READINGS IN PUBLIC FINANCE 

to those aiming to evade payment, the privilege of deducting 
house rent, wages, interest upon incumbrances, and expenditures 
for repairs, opened an avenue for evasion and fraudulent return ; 
and it occasions no surprise that, as a result, the tax was unpopu- 
lar, the returns incomplete, and the burdens unequally distributed. 
This measure had scarcely received the signature of the Presi- 
dent, when Congress, by joint resolution, imposed a special in- 
come tax of 5 per cent upon all incomes in excess of $600, which 
was collected in addition to the regular income duty of that year. 
It was assessed but once, in October, 1864, the war closing early 
in the year following, and produced $29,381,862, a striking com- 
mentary on the improvement in the method of assessment, as 
well as an indication of the loyalty and patriotism of the people. 

The classifications of the law of 1864 remained in force for but 
one assessment, when they were again reduced to two, and all 
incomes in excess of $5000 were rendered dutiable at 10 per cent, 
all below that sum and in excess of $600 being taxable at the old 
rate of 5 per cent. 

The war closed almost immediately after this latter modifica- 
tion had been made, and the imperative necessities of the treasury- 
were in part relieved. Naturally, agitation for the immediate 
repeal of the tax at once commenced ; but Congress wisely pre- 
ferred first to relieve those subjects most oppressed by the excise. 
Industry was shackled, and the laws of trade unsettled, by the 
duplication of taxes induced by the general excise. The income 
tax, on the other hand, fell mainly upon accumulated wealth, and, 
in the mind of the Revenue Commission,^ would "probably be 
sustained with less detriment to the country than any other form 
of taxation, the excise upon spirituous and fermented liquors, 
and tobacco, posejbly excepted." It is this imipotency of the in- 
come tax to affect prices and industry, as well as its non- 
interference with the free employment of capital, which renders 
it such a fit emergency tax. It is, in addition, elastic, and capable 
of immediate and indefinite expansion in time of temporary 
necessity. 

Unfortunately, the report of the Revenue Commission, so re- 
plete and satisfactory in other respects, offers but little informa- 

1 In 1865 Congress appointed a Revenue Commission, of which David A. Wells 
was one of the members, to consider the best methods of reducing the burden- 
some taxes imposed during the war. — Ed. 



THE GENERAL INCOME TAX 425 

tion in regard to the operations of this tax. Its temporary 
retention was, however, advocated ; but the element of progres- 
sivity was deemed to be an unjust discrimination, and a ''tax on 
the results of successful industry and business enterprise." The 
commission therefore recommended the repeal of this discrimi- 
nation, and the imposition of a uniform rate of 5 per cent on all 
incomes in excess of $1000, which sum was held to be no more 
than the equivalent of $600 at the time when the tax was first 
imposed, inasmuch as the advance in the prices of all commodi- 
ties had greatly enhanced the cost of living. The report further 
advised that deductions for house rent be no longer allowed, or, 
if permitted, that they be limited to $300; for such excessive 
rentals had been permitted by the assessors in the past that in 
New York alone the estimated losses to the revenue by reason 
of this permission exceeded $2,000,000 a year. 

Congress acceded to the report in so far as it related to the 
raising of the exemption to $tooo, with a uniform rate of 5 per 
cent upon all incomes in excess of that surn, while the proviso was 
added thereto that the tax should expire in 1870. This latter 
provision was not observed, however; for Congress, fearing a 
deficiency, later extended its operations for tw^ years more, but 
with the exemption increased to $2000. It is of interest to note 
that under these later provisions the tax became even more un- 
popular than it had been before, as it assumed in the eyes of 
the payer the form of a compulsory tribute imposed upon large 
wealth. In addition to the exemption of S2000, as well as all 
taxes paid, deductions were also permitted, as in earlier measures, 
for all losses "actually sustained from fires, floods, shipwrecks, or 
that occurred in trade; the amount of interest paid during the 
year, the amount paid for rent or labor to culti^^ate land," as well 
as any expenditure incurred in repairs other than those for 
improvement. 

The effect of these provisions was greatly to impair the produc- 
tivity of the tax. Thus, in 1871, the number of taxables returned 
was but 74,775, while in the following year (the last of its 
operation) they fell off still further to 72,949 ; while the receipts 
for the same years were $14,434,949 and $8,146,686 respectively. 

The income tax has always been unpopular with certain classes. 
It is indicted as invading the sanctity of the most private affairs, 
as being inseparable from inquisitorial .scrutiny into business 



426 SELECTED READINGS IN PUBLIC FINANCE 

relations, and an insufferable intrusion into those affairs of the 
individual which are in a sense sacred, and which in the past had 
been exempted from the visits of the taxgatherer. It is further 
alleged that a tax which offers such opportunities for evasion is 
a charge upon honesty and patriotism, and a premium upon 
perjury. 

Unquestionably the tax was exposed to widespread evasion, 
especially in the large cities. Such complete confidence was re- 
posed in the individual that evasion was an easy matter; and 
the instructions of the commissioner, early in 1863, that the 
returns should be open for inspection only to officers of the 
revenues, simply facilitated it. By a later ruling, however, all 
returns were thrown open to the public, "in oider," as the com- 
missioner said, "that the amplest opportunity may be given for 
the detection of any fraudulent returns that may have been 
made." That this ruling had its expected result may be ques- 
tioned; for it induced other evils, which probably offset any 
stimulus to honest returns. 

In order to facilitate the collection of the tax, extensive use 
was made of the principle of stoppage at the source. Corporations 
of a certain kincLannouncing dividends were directed to deduct 
the tax, and pay the same to the collector before the distribution 
of earnings to the stockholders. By this means a large portion 
of the tax was collected before the income reached the hands of 
the individual, while fraudulent returns were checked, and the 
necessity of supervision reduced to a minimum. It was estimated 
that the cost of returning this portion of the tax did not exceed 
one fifth of one per cent, a fact which led the commissioner to 
recommend that the system of stoppage be extended to all cor- 
porations for prc^t declaring dividends, as later provided in the 
measure of 1894. How efficient this method was will appear from 
the fact that in 1865, when the total receipts from incomes were 
$32,050,017, nearly 40 per cent, or $11,346,018, was turned into 
the treasury from the earnings of banks, canal, railroad, in- 
surance, and turnpike companies, and federal employees. 

But despite the fact that the income tax was unpopular, and 
the returns depleted by fraud and evasion, it proved one of the 
most satisfactory, from a purely fiscal point of view, of the many 
expedients hit upon by Congress. 

In 1865 it produced as much as liquors, both malt and distilled, 



THE GENERAL INCOME TAX 427 

and tobacco; while in the year following it returned nearly 40 
per cent more than these combined sources. In the former year 
.over 15 per cent of the entire internal revenue receipts was 
derived from this source. In 1866 over 23 per cent, and in 1867 
over 24^ per cent. 

* * '(■' * * * * 

Following the Act of March 2, 1867, which increased the 
exemption allowed to liooo, the number of taxables returned 
manifested a considerable falling off, while the receipts were 
diminished by about one half. During the four years of the 
operation of the revised rate, the average number of taxables 
returned was 267,210, of which number nearly 60 per cent paid 
taxes in excess of $20. 

As a crowning enactment of this long period of experimenta- 
tion, the limit of exemption was increased in 1870 to $2000, with 
the avowed intention of relieving all save comparatively large 
incomes from its operation. At the same time the rate was 
reduced to 2^ per cent, at which point it remained until 1872, 
when the tax expired by limitation. 

From the experience of these years it is not possible to draw 
any absolute conclusions as to the availability of the income tax 
for federal purposes, inasmuch as the measure of a tax lies 
largely in its fitness to conditions and the times ; and the defects 
of the duty during this period were largely administrative in 
character, traceable to the inefficiency of its administration. The 
entire service was experimental, the men untrained, and the 
machinery imperfect ; and, had the tax been ever so well suited 
to our political and social conditions, its productivity would have 
suffered greatly from this cause. 

53. The Income Tax of 1894. — On account of a deficiency in 
the revenues and in order to facilitate revision of the tariff, 
another federal income tax was established in 1894. Dr. Howe^ 
gives the following account of this tax, which was speedily de- 
clared to be unconstitutional : 

The provisions of the measure relating to incomes were 
modeled upon the later war legislation. They provided that the 

1 Taxation in the United States, pp. 233-236. Reprinted with consent of author 
and pubHshers. 



428 SELECTED READINGS IN PUBLIC FINANCE 

tax should be first assessed on or before the first Monday in 
March, 1895, computed on the incomes received during the year 
1894. The duration of the measure was Hmited to five years. AH 
persons having an income in excess of $3500 were required to 
make a verified return to the collector, as were all persons acting 
in a fiduciary capacity ; and in estimating the income of any per- 
son for this purpose there was to be included: (i) all interest 
received upon stocks, bonds, and other securities, save such bonds 
of the United States as were exempt from federal taxation; 
(2) all profits realized within the year from sales of real estate 
purchased within two years previous to the close of the year from 
which income is estimated; (3) interest received or accrued upon 
evidences of indebtedness, whether paid or not, if good and 
collectible ; (4) the amount of all premiums on bonds, stocks, etc. ; 
(5) the amount of sales of live stock, sugar, cotton, wool, butter, 
cheese, pork, beef, mutton, or other meats, hay and grain, or 
other vegetable, or other productions, being the produce of the 
estate, less the amount expended in the raising or purchase of 
such produce, as well as any part consumed directly by the 
family; (6) money, and the value of all personal property ac- 
quired by gift or inheritance ; (7) all other gains, profits, and 
income from any source whatsoever, except so much as has been 
already taxed through the disbursing officer of the government 
or of a private corporation. In computing such returns, how- 
ever, the following deductions were also permitted in addition 
to the minimum exemption of $4000: (i) the necessary expenses 
actually incurred in carrying on any business, occupation, or 
profession ; (2) all interest due or paid within the year on exist- 
ing indebtedness ; (3) all national, state, county, school, and 
municipal taxes ; (4) losses actually sustained during the year 
incurred in trade, or arising from fires, storms, or shipwreck, 
and not compensated for by insurance or otherwise; (5) debts 
ascertained to be worthless. No deductions were permitted for 
expenditures for improvements. In case the taxable neglected 
or refused to make such return, the collector was authorized to 
make up a list from the best information available, and to add 
thereto 50 per cent as a penalty, and in case of fraudulent return, 
100 per cent. Appeal therefrom was permitted to the collector of 
the district, and from him to the Commissioner of Internal 
Revenue. 



THE GENERAL INCOME TAX 429 

The principle of stoppage at the source was more widely ex- 
tended in this measure than ever before; and all banks, trust 
companies, saving institutions; fire, marine, life, and other in- 
surance companies ; railroads ; canal, turnpike, telephone, tele- 
graph, express, electric lighting, gas, water, street railway 
companies ; as well as all other corporations or associations 
doing business for profit in the United States, no matter how 
created or organized (but not including partnerships), were di- 
rected to deduct the tax of 2 per cent upon all profits and net 
incomes before the payment of the same to stockholders or 
additions made to surplus. And net profits for the purpose of 
estimating the tax were to include any amounts paid to stock- 
holders, or carried to the account of any fund, or used for im- 
provements or other investments.^ The same principle was applied 
to federal salaries in excess of S4000, as well as any salaries paid 
by corporations to their employees in excess of that sum. 

The act departed from earlier legislation in yet another and 
very important particular; for it forbade under heavy penalties 
the divulgement by the officers of the revenue of the incomes, 
losses, or returns of any taxable, whether a private corporation 
or an individual. 

All returns were to be listed upon blanks provided for the pur- 
pose on or before the first Monday in March, and were to be 
paid before the first day of July of each year. 

The law doubtless contained many imperfections, and in many 
places was so worded as to cause irritation to the payer, and to 
open wide the door for evasion, fraud, and false swearing. It 
reposed great powers, moreover, in a politically appointed serv- 
ice. These imperfections were particularly noticeable in the 
deductions allowed. For instance, as to what are "necessary 
expenses incurred in carrying on business," "losses actually 
sustained during the year," "debts ascertained to be worth- 
less," there lay a possibility of wide divergence of opinion. 
The provision that corporations should deduct the tax from 
the salaries of their employees was absolute, notwithstanding the 
fact that they might have been entitled to deductions which 

1 The act specifically exempted all organizations of a religious, charitable, or 
educational character, fraternal or beneficial orders, building and loan associations, 
and savings banks and insurance companies of a strictly mutual character. Nor 
did it apply to states, counties, or municipalities. 



430 SELECTED READINGS IN PUBLIC FINANCE 

would bring their incomes below $4000. Corporations were like- 
wise compelled to pay the tax upon their net earnings, irrespec- 
tive of whether the recipient of the dividends had an income of 
$4 or $40,000. Moreover, the collector was granted the widest 
latitude and most unusual powers. He was empowered to pass 
upon interest due and payable; to increase the return of the 
individual, subject, however, to appeal ; and to make up a taxable's 
income from the best information available. These but indicate 
some of the difficulties which would have beset the administra- 
tion of the measure, as well as the individual honestly desirous 
of making a fair return. Had we a trained service, these objec- 
tions would lose much of their seriousness ; but, with collectors 
appointed for partisan service rather than merit, there is reason 
to believe that this power would have become a means of unjust 
discrimination. It certainly offered great opportunities for cor- 
rupt collusion with taxpayers. 

54. The Federal Income Tax of 1913. — Following the adop- 
tion of the Sixteenth Amendment to the Constitution, which em- 
powered Congress to levy an income tax without apportionment 
upon the basis of population, a new federal income tax was intro- 
duced. Concerning it the editor^ has written as follows: 

The new income tax is probably a permanent addition to the 
fiscal machinery of the United States. It was written into the 
statutes after twenty years of discussion following the abortive 
law of 1894, and only after amendment of the federal constitu- 
tion. The need of revenue was but one of the reasons for its 
enactment, and a compelling motive undoubtedly was the desire 
to change the distribution of national taxation, hitherto confined 
to custom and excise duties. Beyond doubt the present law ex- 
presses the settled purpose of the country to raise some part of 
the charges of the federal government by a tax that shall be 
apportioned according to the income of the citizen rather than 
according to his expenditure. As one who has long favored such 
a readjustment, I propose to consider how far the law of 191 3 
has actually succeeded in taxing the people of the United States 

^ Paper reprinted from Proceedings of the National Tax Assjciation, Vol. VIII, 
pp. 264-279. 



THE GENERAL INCOME TAX 43 1 

in proportion to their incomes. I shall also consider the relation 
of the income tax to state and local taxation. 

There are three methods of levying a tax upon incomes : 
assessment by official estimation, assessment by taxpayers' 
declarations or returns, and collection at the source. The first 
is the method used by Prussia prior to the reform of 1891. It 
has never secured anything more than a rough approximation 
to a correct result, and in Prussia appears to have resulted in the 
escape of fully one-half of the income legally subject to taxa- 
tion. It is, however, a method upon which all income taxes are 
compelled to rely in cases where contributors fail to make satis- 
factory returns, and is certainly an indispensable adjunct of any 
tax upon incomes.. The second method is used to a greater or 
less extent by all countries levying an income tax, and is that 
upon which the various German states rely, having been adopted 
by Prussia in 1891. It is undoubtedly superior to the first, and, 
under proper conditions, results in a substantially complete as- 
sessment, as in the Canton of Basle and the state of Wisconsin. 
The third method is largely employed by the British income tax, 
and is more or less in vogue elsewhere, outside of Germany ; but 
it cannot be applied to all kinds of incomes, and therefore is 
always supplemented by the second and even the first. 

It is not strange that the framers of our federal income tax 
decided in favor of collection at source wherever that was .pos- 
sible. The success attending this method in Great Britain had 
led many other countries to follow her example, and the failure 
of our states to reach the great mass of personal property by 
means of taxpayers' declarations naturally created the impression 
that an income tax could be collected only at the source. More- 
over, the success of our states in collecting taxes directly from 
corporations rather than from shareholders reinforced this con- 
clusion, and most American students of finance had long been 
advocates of the method. The case seemed clearly made out, 
and therefore the new law provides that the normal tax of 
I per cent shall be collected so far as possible at the source. 

But further consideration reveals various disadvantages of 
this method of collection, which are so serious as to justify 
reopening of the question. The first and most important is 
that, to a very considerable extent, collection at source changes 
the incidence of the tax and places the burden upon the wrong 



432 SELECTED READINGS IN PUBLIC FINANCE 

shoulders. This is particularly true in the taxation of corpora- 
tions and interest upon corporation bonds. 

In 1 910 Congress levied a tax of i per cent upon the net 
income of corporations, which was legally and practically an 
excise duty. There may have been a few cases in which this tax 
operated as one of a number of causes leading to a reduction 
of dividends, or prevented an increase that otherwise would have 
taken place. But in general stockholders were not affected by 
it; the tax was merely absorbed with other charges against 
gross income and served as an incentive to increased prices. 
With public-service corporations under state or federal control 
the tax became an element determining what should constitute 
reasonable returns for the service rendered, and therefore fig- 
ured in subsequent arguments for higher rates. The general 
effect of the law of 1910 was to impose an indirect tax upon con- 
sumers, and this charge has merely been continued by the law of 
1913. To-day a citizen who receives $20,000 from dividends upon 
corporation stock is exempt from the normal tax, while one who 
receives a salary of $5000 is subject to taxation upon the excess 
of his income above $3000, or $4000 if he is married. 

Interest upon corporation bonds or other evidences of in- 
debtedness is also taxed at the source, with the result that the 
tax in most cases falls upon the corporations and the bondholder 
goes scot-free. The greater part of the corporation bonds now 
outstanding have been issued under contracts by which the 
corporations have agreed to pay the stipulated interest free from 
any tax they may be required to withhold or deduct, and the 
law of 1913 is so drawn as to bring the present income tax 
clearly within the scope of these so-called tax covenants. The 
result is that the corporations are now paying most of the nor- 
mal tax upon bond interest, and the bondholders are exempted ; 
so that a citizen having an income of $20,000 from corporation 
bonds pays nothing, while his neighbor who has a salary of $5000 
is taxed. The tax, therefore, is in effect an excise duty upon 
corporations, and in many cases will be shifted to consumers 
either in higher price or in poorer service. 

There was, unfortunately, in Congress and perhaps elsewhere, 
a complete misunderstanding of the nature of these tax covenants, 
and it seems to have been thought that to impose the tax directly 
upon bondholders as a personal obligation would violate the 



THE GENERAL INCOME TAX 433 

spirit and perhaps letter of contracts corporations had made with 
their creditors. There are, indeed, some issues of bonds that 
contain a covenant by which the corporations agree to pay any 
taxes the United States may levy upon the interest, and if Con- 
gress had interfered in such cases it would have impaired the 
obligation of contracts. But the great majority of tax covenants 
merely require the corporations to assume taxes that they are 
required to withhold or deduct from the interest, and have no 
reference, express or implied, to a personal tax levied upon the 
bondholder and payable by him. There was, therefore, no ques- 
tion of violation of contracts, and Congress should not have 
treated the matter as an issue between corporations and their 
creditors. The only question was one of public policy, — Is it 
better to levy a direct personal-income tax on bondholders or to 
levy an indirect tax upon bond interest, payable by corporations 
and ultimately shifted to consumers in most cases ? There seems 
to be but one answer. The income tax should be so levied as to 
fall upon citizens in proportion to their incomes, and bondholders 
should not be exempted. This is the very purpose of an income 
tax, and to convert it into an indirect tax which will be largely 
shifted to consumers is to pervert its nature, impose the burden 
upon the wrong persons, and defeat the object of the Sixteenth 
Amendment. To-day a citizen receiving $20,000 from dividends 
and bond interest is wholly exempted from the income tax, and 
one receiving $20,000,000 is exempted from the normal tax, 
though, of course, subject to the additional tax. Congress had 
no scruple about making the additional tax a personal obligation 
payable by the bondholders ; how ridiculous, then, is the conten- 
tion that to levy the ordinary tax in the same way would impair 
the obligation of contracts ! 

To what extent collection at source tends to lead to a shifting 
of the tax on other classes of income is difficult to say. For 
the most part it has been taken for granted that an income tax 
cannot be shifted and must fall upon income receivers. But 
economic laws and forces do not operate in vacuo ; that is, under 
conditions where they do not encounter the resistance of oppos- 
ing forces. They must work out their result through countless 
business transactions, in which the unequal strength, knowledge, 
and bargaining skill of the contracting parties materially in- 
fluence the outcome. Therefore it is always better to place the 



434 SELECTED READINGS IN PUBLIC FINANCE 

tax on the right shoulders in the first instance, wherever that is 
practicable ; and it is unwise to impose it on the tenant or debtor 
in the expectation that, in accordance with general economic laws, 
it will finally fall upon the landlord or creditor. Our present law, 
it is true, invalidates future contracts to assume the income tax ; 
but it does not and cannot control the amount of contract rent 
or interest. It introduces into contracts for the payment of 
"fixed and determinable" income an element that in many cases 
affects the terms upon which agreements are closed, and pro- 
duces conditions under which all the forces of economic friction 
and inertia oppose the transfer of the tax to the person it is 
intended to reach. 

The second objection to collection of an income tax at source 
is that it places the government in an inconsistent position and 
injures what I may call the morale of the tax. The government 
first undertakes to collect at the source as much of the tax as 
possible, on the theory that if it proceeds otherwise there will be 
wholesale evasion ; and it then calls upon citizens to make returns 
of the rest of their incomes. It has advertised in advance its 
expectation that incomes will not be honestly returned by per- 
sonal declarations of taxpayers, and it then requires citizens to 
do that which it does not expect them to do honestly. A better 
method of destroying the morale of taxpayers could hardly be 
devised, or one more certainly calculated to make the income tax 
a tax on honesty. 

This view of the case has been called sentimental and theoreti- 
cal, and the objections have been considered of little weight 
beside the practical advantages of collection at source. Senti- 
mental it undoubtedly is ; honesty is partly, and in public matters 
very largely, a matter of sentiment. Theoretical it certainly is, 
also ; but the theory has found practical recognition in the income 
taxes of various states, which are on the wholci as successful as 
any others. Some years ago I asked the head of the finance 
department of the Canton of Basle why his state had never under- 
taken to collect any part of its income tax at the source. We 
have not done so, he said in substance, because we require the 
people of Basle to pay the income tax upon their entire income, 
and do not expect them to evade any part of it ; if we were to 
collect part of the tax by the British method, orr people would 
naturally think they were not expected to pay the rest loyally. 



THE GENERAL INCOME TAX 435 

This is, when you carefully consider it, the ultimate logic of 
collection-at-source when applied to a general income tax. Some 
forms of income cannot be reached at the source and must be 
taxed by personal return or official estimate. A government that 
does not expect to succeed in taxing such incomes should never 
levy a general income tax, because at this point it would tax 
not income but honesty. By adopting collection-at-source it ad- 
mits failure at the outset, and can hardly blame the citizens if 
they act upon the same logic as their government. This objec- 
tion, of course, would not apply to a partial income tax levied 
only on such income as can be taxed at the source. But it is 
valid for any general tax upon income, and it is vital. No gov- 
ernment should levy what it knows to be a tax upon honesty; 
and if it believes itself able to collect a general income tax, it 
should adopt no method for the collection of any part of the tax 
that implies disbelief in its ability to collect others. The morale 
of the taxpayers cannot fail to be impaired by such inconsistency 
in the tax law. 

The third objection to collection-at-source is that it is incon- 
venient and expensive. If the tax applied to all incomes, what- 
ever their amount or nature and without exemption or abatement, 
no difficulty would arise except in cases where incomes pass 
through several hands on their way from the source to the final 
recipient. But when exemptions and abatements are granted, — 
and this is' the usual practice, — the difficulties multiply and soon 
become serious, because in the natural course of things many 
incomes will be taxed at the source although the recipients are 
exempt or entitled to allowances. The practice in Great Britain 
seems to be to collect the tax at the source and then permit the 
taxpayers to apply for refunds ; and in 1909 it was stated that 
the Inland Revenue Department had to deal with 450,000 repay- 
ments and nearly 700,000 abatements.^ Even then it seems that 
many persons entitled to refunds did not receive them either 
because they were ignorant of their rights or because the amount 
involved was not large enough to justify the trouble and expense 
of making application. 

The British method has at least the merit of placing upon the 
government the trouble and expense of dealing with exemptions 
and abatements; our own income tax for the most part places 
1 Means, The Methods o£ Taxation, pp. 156-159. 



436 SELECTED READINGS IN PUBLIC FINANCE 

the burden upon those persons who handle incomes either at the 
source or on their way to the recipient. The right of the govern- 
ment to collect taxes at the source, if it prefers to adopt that 
method, is doubtless unassailable ; but if such collection involves 
much trouble and expense, common fairness requires that proper 
compensation be made for the service. The situation is ag- 
gravated by the fact that a large part of the work is not in 
collecting the tax but in dealing with incomes entitled to exemp- 
tions and abatements. In effect the United States has granted 
to certain persons exemption from an income tax collected at the 
source, and has thrown upon certain other persons, without com- 
pensation, the greater part of the work resulting from claims to 
exemption. Whether this amounts to taking private property for 
public use without compensation is a question I am content to 
leave to the lawyers, but it certainly is unjust and vexatious. 

The difficulty is greatest in the case of interest upon corpo- 
ration bonds and other obligations, since a very large proportion 
of these securities consists of coupon bonds and the tax must be 
deducted from all payments, whatever their amount. In some 
sections of the country the larger city banks have made arrange- 
ments by which country banks have been relieved of trouble and 
expense in connection with the tax, but this concentrates the 
burden rather than diminishes it. I am informed that one bank- 
ing institution has been put to an additional expense of $15,000 
per annum, and another to an expense of $20,000. These figures 
are exclusive of the heavy initial cost the system entailed, and 
represent what is likely to be the normal annual outlay for these 
institutions. If data could be secured for the entire country the 
total burden would surely be impressive. 

Even worse than the absolute amount of the expenditure is its 
relation to the amount of tax actually paid the government. The 
institution that is spending $15,000 will have collected at the end 
of the first year $53,000 of income tax upon corporation bonds, 
the cost of collection amounting to nearly 30 per cent. A traction 
company collected $8200 of tax between November i, 1913, and 
February i, 1914, and spent $3299 in performing this service. 
Here the cost of collection rises to 40 per cent. Another public- 
service corporation collected $9821 of tax up to August i, and 
expended $7011 in so doing, the cost of collection amounting to 
over 70 per cent; but these figures may include initial outlays 



THE GENERAL INCOME TAX 437 

that will not recur. I can find no reason for thinking these cases 
exceptional, and they merely confirm the general opinion preva- 
lent among those conversant with the facts, that the cost of 
collecting the tax on bond interest at the source is absurdly, pre- 
posterously high. The cost of collecting the customs revenue of 
the United States is about 3^ per cent, and the internal revenue 
in 191 1 cost but i^ per cent. The Wisconsin income tax showed 
a net 'cost of collection of 1.28 per cent in its first year. In 
general, any tax that costs more than 5 or 6 per cent to collect is 
uneconomic, and most taxes cost much less than this figure. But 
in respect of bond interest the government of the United States 
is now collecting an income tax at an expense of from 30 to 40 
per cent — to other people. 

My contention is, then, that collecting the income tax at source 
has largely changed its incidence, lowered its morale, and in 
some cases resulted in a preposterously high cost of collection 
which the government throws upon private citizens and corpo- 
rations without compensation. But the question occurs to you, 
doubtless : After all, was not collection at source necessary to 
prevent evasion of the tax ? 

Before answering the question it is necessary to remind you 
that for all practical purposes tax evasion is purely a question of 
degree. There are few taxes, if any, that cannot be evaded to 
some extent. Even a tax on real estate, under the most favorable 
conditions, will fail to reach 100 per cent of the actual value of 
every parcel of realty, while under poor administration a very 
large percentage of taxable value will escape assessment. As a 
matter of fact we know that a loo-per-cent assessment upon; 
every parcel of realty is an unattainable ideal, and that for prac-^ 
tical purposes an average assessment of from 90 to 95 per cent 
must pass for full assessment. Yet in discussing the taxation of 
incomes it is usually assumed, tacitly of course, that there are 
taxes that can be collected without any possibility of evasion; 
and the income tax is then judged by this assumed absolute 
standard. Slich procedure leads nowhere. We must, rather, 
recognize clearly that evasion is a matter of degree, and must 
judge the income tax accordingly. The question we have to con- 
sider, therefore, is this : Can a general income tax be collected 
with reasonable certainty and completeness without resorting to 
collection at source? 



438 SELECTED READINGS IN PUBLIC FINANCE 

It must further be observed that one who answers the question 
in the negative cannot possibly advocate a general income tax 
without becoming an advocate of political immorality. For some 
incomes cannot possibly be taxed at the source, and one who 
believes that no other method can give a reasonably complete 
assessment must admit that in its application to these incomes a 
general income tax becomes one of the worst of fiscal expedients 
— a tax upon honesty. Such a person may very properly ap- 
prove of special taxes upon incomes that can be reached at the 
source, but as an advocate of a general income tax he stands in 
no enviable light. 

The answer to our question is, I believe, as follows : the 
operation of an income tax depends wholly upon the conditions 
under which it is levied. With poor administration, excessive 
rates, and a hostile public opinion, an income tax becomes a 
mere tax upon honesty, except in so far as it can be collected at 
the source; while under the opposite conditions it can be en- 
forced with substantial certainty and justice, and as successfully as 
most other laws. Some evasion there will be, necessarily ; but it is 
possible for an income tax to be so drawn and administered as to 
command general favor and reduce the amount of evasion to a rea- 
sonable minimum. As examples of such income taxes I can refer 
to the income tax of the Canton of Basle, the Prussian income tax 
in those communities that do not raise its rate to an excessive 
figure, and the tax now in successful operation in Wisconsin. 

To develop fully this statement would carry me far beyond the 
necessary limits of this paper. It needs no demonstration that 
inefficient boards of local assessors will make bad work of an 
income tax. It cannot be doubted that excessive rates, such as 
prevail in Italy and some Prussian communities, lead to wide- 
spread evasion ; and it is certain that when public opinion is 
decidedly hostile, as it has long been in France, the enforcement 
of an income tax must be extremely difficult. But in the United 
States the conditions were not, and need not have been made, 
unfavorable. The Bureau of Internal Revenue wAs well or- 
ganized, and was undoubtedly efficient ; there was no need of 
imposing a high rate of taxation; and public opinion strongly 
supported the tax. Congress had as fair an opportunity as could 
be desired to enact a well-considered law, and was mistaken in 
believing that it was necessary to collect the tax at the source. 



THE GENERAL INCOME TAX 439 

Probably the decisive consideration in, favor of the method 
adopted was the admitted failure of our states to tax personal 
property or incomes effectively by means of taxpayers' declara- 
tion or official estimation ; but here, Congress misread the lesson 
of experience. All that the failure of the states taught v^as this : 
That it is impossible to collect from personal property a tax 
that would absorb half the taxpayers' income; and that a state 
income tax cannot be successfully enforced by local assessors, 
and as part of a system of taxation generally unenforcible. 
Wisconsin had already shown that with proper methods of 
administration, a reasonable income tax can be collected with 
substantial certainty and completeness ; and against Wisconsin's 
evidence, the experience of other states under the very opposite 
conditions should have counted for little or nothing. Our coun- 
try undoubtedly wanted an income tax ; with all the criticism of 
details of the law of 1913, opposition to the principle of the tax 
has been so infrequent as to be negligible ; and even the confused, 
cumbersome, and vexatious measure finally enacted has not made 
the income tax, as such, unpopular. Under these conditions, 
Congress could and should have levied a personal income tax 
assessed by taxpayers' declaration. 

Of course it was frequently said that all men are liars, and 
that you cannot make them honest by law. But the first part 
of this statement, while it; may be competent evidence of the 
character of the person making it, does not convict anyone else 
of mendacity, and the second part is wholly irrelevant to the ques- 
tion at issue. All men are not liars ; most men will deal honestly 
with a government that treats them fairly; and the experience 
of Wisconsin shows that even the abused American taxpayer will 
pay loyally an income tax reasonable in amount and levied im- 
partially upon everyone subject to it. Not taxation itself, but 
unfair, excessive, and discriminating taxation is what has made 
the average American a tax-dodger. If Congress had had the 
wisdom to levy the income tax as a gentleman's tax, there is no 
doubt that the taxpayers of the United States would have made 
loyal response. 

But although the tax should have been collected in all cases 
from taxpayers, and not at the source, it would not have been 
necessary to rely exclusively upon personal declarations of in- 
come. In order to deal effectively with the small minority who 



440 SELECTED READINGS IN PUBLIC FINANCE 

might make false returns, Congress might have instituted a 
system of reports at source, by which the people who under the 
present law are required to withhold and deduct the tax would 
have been required to report to the government the amount of 
the income and name of the recipient. This is an expedient which 
many governments employ to-day in taxing wages and salaries, 
and is capable of application to any form of fixed and determi- 
nable income. It was urged upon the committees having the in- 
come tax in charge, but not until after the measure had passed 
the House of Representatives and was beyond its formative stage. 
This plan would have prevented evasion quite as effectively as the 
present arrangement; its practical details would have been far 
easier to grasp ;^ it would have diminished enormously the labor 
and expense imposed upon those affected ; and it would not have 
changed the incidence of the tax or impaired its morale.^ It 
would, furthermore, have provided a check upon the returns of 
incomes subject to the additional tax; and at that point, where 
the rates are highest and the temptation to evade is strongest, 
Avould have been far more effective than the existing law. 

While collection at source is undoubtedly the chief cause of 
the inequalities that must arise under the present income tax, 
it is by no means the only cause of inequality. In its very defi- 
nition of income the law of 1913 is defective. I have time to call 
attention to only two points. No provision is made for including 
in a person's taxable income the fair rental value of a dwelling 
house occupied by the owner or the value of agricultural produce 
consumed on a farm. The result is that a person who invests 
$20,000 in securities is taxed upon the income he derives there- 
from, if his total income exceeds $3000, while another who in- 
vests $20,000 in his dwelling is exempt from taxation upon the 
amount of income, in the form of use and enjoyment, that he 
derives from this investment. This is wrong in theory, and is 
contrary to th^ practice of well-considered income taxes. The 

1 Even interest coupons could have been reported by a method that experienced 
bankers pronounced simple and effective. Another method of dealing with the 
coupon problem would have been the imposition of a stamp tax payable by the 
bondholder. (See briefs and statements filed with the Committee on Finance; 
Income Tax and Custom Administration, p. 2096.) 

2 In behalf of clients, I presented this plan to the Senate Committee on 
Finance, in May, 1913. Briefs and Statements, pp. 2071-2075. 



THE GENERAL INCOME TAX 441 

exemption of produce consumed on a farm introduces another 
fruitful source of inequality, since it exempts an important part 
of the income of one class of persons, while others are taxed on 
incomes of the same amount expended for household supplies and 
provisions. 

Together with the high exemption of $3000 or $4000 of in- 
come from the operation of the normal tax, these defects in the 
definition of income work practically the total exemption of 
agricultural industry and in effect exempt the agricultural states. 
A farmer and his wife are not subject to taxation unless, in addi- 
tion to house rent and a good part of their living expenses, 
they receive a net cash income in excess of $4000. Nothing in 
the condition of American agriculture justifies this discrimi- 
nation. For more than fifteen years our farmers have enjoyed 
uninterrupted prosperity, and their products have been precisely 
the ones most affected by the general rise of prices. These fea- 
tures of the law of 1913 are another cause of great inequality, 
and are absolutely without justification. They are contrary to 
the practice of best income taxes, and are indefensible class and 
sectional legislation. 

We must conclude, therefore, that the income tax of 1913 has 
not given the country what it had the right to expect — a tax 
levied upon citizens in proportion to their income, that is, accord- 
ing to their abiHty to pay. Instead of that we now have a law 
that largely exempts holders of corporation securities from the 
ordinary tax and substantially exempts agricultural industry, 
while it taxes incomes derived from unincorporated manufactur- 
ing or commercial enterprise and those received in the form of 
salaries and professional earnings. So far as most corporate 
capital is concerned, the ordinary income tax has been converted 
into an excise, and will be paid for the most part by the ultimate 
consumers in the form of higher prices or poorer service. To a 
very large extent, to a degree practically commensurate with 
the field of corporate industry, Congress has exempted funded 
incomes from the ordinary tax, and has confined that tax to 
incomes from labor and unincorporated enterprise. This out- 
come is a distinct disappointment, and when appreciated by the 
country should lead to a complete recasting of the law. 

A final word concerning the relation of the federal income tax 
to state and local taxation. Obviously the national government 



442 SELECTED READINGS IN PUBLIC FINANCE 

has now entered the field of direct taxation hitherto reserved in 
ordinary times for the exclusive use of the states. This is not 
in itself objectionable, but it raises important questions concern- 
ing the proper division in the field and the coordination of the 
two systems of taxation. 

In regard to the first point it is very clear that the federal 
government in ordinary times should make very moderate use 
of direct taxation. There is, as we all know, a limit to the 
revenue that can be raised by direct levies upon property or 
income; and if the federal government makes excessive de- 
mands, the resources of the states will be seriously limited. The 
nation has at its command the whole field of indirect taxation, 
from which the states are almost entirely excluded, and it has 
no need of imposing heavy direct taxes in ordinary times. If it 
ever does so, it will seriously embarrass the state and local gov- 
ernments, which have to meet outlays that far exceed, in the 
aggregate, the expenditures of the national government. 

If this view is correct, it follows that the maximum rates of 
the additional tax imposed by the law of 191 3 are clearly exces- 
sive. They rise to 6 per cent upon the excess of incomes above 
$500,000, and with the ordinary tax make a total charge of 
7 per cent. Now the limit of safety for income taxes is probably 
10 per cent ; and it certainly does not exceed 12, as the experience 
of all countries shows. The United States, therefore, has appro- 
priated for its use about 70 per cent of the total possible pro- 
ceeds of direct taxation upon large incomes, and its action will 
seriously embarrass the states in the efforts they are now making 
to tax personal property effectively or replace the personal- 
property tax with a state tax upon incomes. 

Congress has acted with total disregard of the interests of 
the states, and apparently on the assumption that only the claims 
of the federal treasury require consideration. 

What readjustments in state and local taxation the federal 
income tax makes desirable or necessary is a question of peculiar 
interest to this Conference. One proposal is that the states shall 
abandon the attempt to tax personal property or income, in favor 
of the national government. This is likely to meet with little 
favor. The states are now devising new and better methods of 
taxing these objects, and since they sorely need the revenue, are 
not likely to give the federal income tax exclusive right of way. 



THE GENERAL INCOME TAX 443 

Another proposed solution is that the states abandon the tax- 
ation of personal property and income and that the national 
government levy an income tax the proceeds of which shall be 
divided with the states. Such, a solution, however, would be 
attended with great difficulty in securing a basis of distribution 
satisfactory to the states. It would also have the grave defect 
of making the states dependent upon the national government for 
a substantial part of their revenues. There are undoubtedly those 
who would welcome such a condition, those who in their desire 
either for national centralization or municipal home rule wish 
to see our state governments shorn of their important functions 
and deprived of real vitality. But others should realize th^t in 
the long run the hand that controls the purse is likely to control 
all, and should reject any proposal that deprives the states of 
effective control of their revenues. 

A third view is that a federal income tax may, under right 
conditions, facilitate greatly the introduction of state income 
taxes in place of the existing taxes upon personal property. If 
the citizen must now pay to the federal government a direct tax 
upon his income, it will obviously be easier and more convenient 
for him to make a similar return of income for state and local 
taxation than to make a totally different return of his personal 
property. No question of double taxation can arise, because 
the two income taxes would be for different orders of govern- 
ment each of which has the right to levy direct taxes for its 
support. It is also clear that from the administrative standpoint 
there would be a considerable advantage in replacing personal- 
property taxes with income taxes assimilated as nearly as pos- 
sible to a federal income tax. 

But before such an adjustment is possible the federal tax 
must offer a suitable model, and this the law of 1913 cannot do. 
What is requisite is that the national government shall levy a 
personal income tax collected upon the basis of personal returns 
by taxpayers of their entire incomes. This is absolutely incon- 
sistent with collection of the tax at source, but will permit the 
requirement of reports at source as a check upon the small 
minority of persons who might otherwise be tempted to make 
false returns. It would give us complete returns from all citizens 
in the districts where they are domiciled, and this would furnish 
the basis for cooperation between national and local govern- 



444 SELECTED READINGS IN PUBLIC FINANCE 

ments in assessing income taxes. The former would profit by 
the more detailed and intimate knowledge of local conditions 
possessed by local assessing boards ; the latter would gain by 
reason of the wider reach and stronger arm of the federal au- 
thority. Such conditions, in fact, would furnish the most favor- 
able opportunity for the much-needed and long-deferred reform 
of prevailing methods of taxing personal property. 



CHAPTER XIII 

PROBLEMS IN STATE AND LOCAL TAXATION IN THE 
UNITED STATES 

55. The Separation of State and Local Revenues: by Charles 
J. Bullock.^ — The following selection presents criticisms 6i the 
well-known project of separating the sources of state and local 
revenues : 

Among plans for the reform of American taxation the proposal 
to separate the sources of state and local revenues holds a con- 
spicuous place. Eminent authorities declare it the *' necessary 
starting point of reform," and "the indispensable initial step" 
to any substantial progress. In one commonwealth complete 
separation has already been effected, and in a number of others 
the process is thought to be well advanced. Yet there has always 
been dissent, and of late the plan has encountered increasing criti- 
cism from persons sincerely interested in the cause of tax reform. 

As the name implies, the proposal is that state and local 
revenues shall be drawn from separate sources. When first 
advanced, the plan was that the states should derive their income 
wholly from taxes on inheritances, corporations, and some other 
independent sources, and that local revenues should be raised 
by taxes on property. More recently, and as an alternative, it 
has been proposed that only part — though perhaps the greater 
part — of the state revenues shall be raised by independent taxes, 
and that the remainder shall be obtained by a direct tax appor- 
tioned among the local bodies in proportion to their respective 
local revenues or expenditures. In both the original and the al- 
ternative forms, plans for separation usually, though I believe not 
necessarily, contemplate that the local governments shall be left 
comparatively free to determine what property shall be taxed and 
what exempted from local taxation. And in both, the essential 
feature is declared to be that there shall be no direct state tax ap- 
portioned among local units according to their assessed valuation. 
1 An address delivered before the League of Virginia Municipalities, Oct. 7, 1909. 

445 



446 SELECTED READINGS IN PUBLIC FINANCE 

The advantages claimed for the plan of separation are nu- 
merous, but the more important are four in number. The first 
is that existing inequalities in state taxation would be removed, 
and substantial justice reached in the distribution of the burden. 
Boards of equalization have signally failed to secure a just ap- 
portionment of direct state taxes distributed according to valu- 
ation, and must always fail, since they have imperfect knowledge 
of local conditions, are subject to pressure of local interests or 
the vicissitudes of politics, and in any case would be impotent 
to overcome the mutual mistrust and antagonism of local taxing 
authorities. But if the states, following natural lines of de- 
marcation between central and local functions, create independent 
revenues from inheritances, corporations, and other sources, it 
it said that a just distribution will be automatically secured — 
the states retaining what properly belongs to them and leaving 
to the localities the general mass of property naturally subject to 
local jurisdiction. And if more money is needed than the states 
can conveniently obtain from independent taxes, it is believed 
that the plan of apportioning a direct tax according to local 
expenditures or revenues offers a just method of distribution 
requiring for its administration nothing but the collection of 
accurate statistics. 

The second advantage is said to be that the abolition of the 
state tax apportioned according to local valuations will remove 
the inducements to undervalue property subject to local taxation, 
and lead automatically to full and fair valuations. In any event, 
boards of equalization will no longer be necessary, since it will 
be immaterial to the taxpayers of one county whether property 
in other counties is assessed at 50, 60, or 100 per cent of its true 
value. And it is sometimes added that for purely local taxation 
it makes no difference to any one whether there is a low valu- 
ation of property with a high tax rate or a high valuation 
with a low tax rate. 

The third benefit expected to result from separation is that 
such an adjustment of state and local revenues would remove 
that diversity of local interests which in our legislatures blocks 
most attempts to modify tax laws, and would open the way for 
other desirable changes. The direct state tax, apportioned ac- 
cording to valuations, binds each locality to every other in a 
single system which is hard to alter, since any change may affect 



STATE AND LOCAL TAXATION 447 

adversely the interests of particular localities, or, what is the 
same thing so far as legislation is concerned, may be feared to 
affect those interests adversely. With this tax either removed 
or apportioned according to local expenditures, it is believed that 
local suspicions and antagonisms would largely disappear, and 
that progressive legislation would become possible. It is chiefly 
for this reason, I take it, that separation of state and local 
revenues has been considered "the necessary starting point of 
reform." 

And the fourth advantage usually, though not always, claimed 
for the plan is that, under it, the various local governments 
might be granted either partial or complete freedom in selecting 
methods of taxation. This I believe to be no necessary part of 
the scheme, since it is conceivable that a state, after establishing 
independent revenues for its own use, might consider it safer to 
prescribe the methods by which local revenues should be raised. 
But it is usually set forth as one of the chief advantages of 
separation, and, under the caption "local option," "home rule in 
taxation," or some other attractive name of supposedly popular 
character, figures prominently in plans of tax reform. The 
chief reason advanced in its favor is that, since local conditions 
differ, each community should be free to adjust its fiscal system 
to its own needs and should be free to work out its own salvation 
in matters of taxation. Uniformity in tax laws is considered 
undesirable, and the need of the time is declared to be freedom 
of experimentation. 

This is the case in favor of separation. Its strength at some 
points must be frankly conceded, and it is supported by weighty 
authority. I must add that formerly, and largely through respect 
for authority, I fully accepted the proposal. Further study, 
however, has brought change of view, and compels me to join the 
dissenters. 

In the first place I can see no guarantee, or even probability, 
that separation would ensure a just distribution of the burden 
of state taxation. It is proposed to create independent sources 
of revenue in conformity with the natural division of state and 
local functions, and it is thought that in this manner a just 
distribution will be reached automatically. But there is no neces- 
sary and automatic connection between the division of govern- 



448 SELECTED READINGS IN PUBLIC FINANCE 

mental functions and the apportionment of sources of revenue. 
The former should be determined primarily with reference to 
convenience and efficiency of administration; the latter should 
depend chiefly upon comparative fiscal needs and resources. The 
national government charters and regulates national banks, but 
concedes to the states, under proper restrictions, the power to tax 
the capital stock and real estate of these institutions; and if it 
ever grants charters of incorporation to companies engaged in 
interstate commerce, we cannot doubt that the states will retain 
power to tax the property of such corporations. In these cases 
the governmental function is of a national character, but the 
property remains subject to state and local taxation because 
fiscal, and doubtless political, conditions require that it shall so 
remain. And similarly with the relations between the states and 
the local governing bodies. The state of New York administers 
the liquor-license tax and shares the revenue with the local 
bodies ; in Massachusetts the towns and cities administer this 
tax and share the revenue with the commonwealth. What natural 
and automatic connection is there in these cases between the 
division of functions and the apportionment of revenue ? So far 
as any rational principle controlled the latter, it was probably 
the consideration of fiscal needs ; but it is probable also that 
politics was the chief factor controlling the division. I do not 
say that there is never a coincidence between the allotment of 
functions and the allotment of revenues, — indeed, the customs 
revenue of the national government furnishes an example of such 
coincidence ; but I do maintain that the controlling factor in the 
distribution of functions is administrative convenience, that the 
controlling factor in the assignment of revenues should be com- 
parative fiscal need, and that between the two there is no 
necessary and automatic connection. 

This conclusion is readily confirmed by study of the particular 
sources of revenue which it is proposed to allot the states. The 
inheritance tax is always on the list, and in the United States 
the propriety of such allocation cannot be questioned at the 
present day. But this is because the tax takes from the local 
bodies nothing that they formerly possessed, and because, further, 
the yield is not large as compared with the needs of the states. 
If fiscal conditions were different, it might be convenient to 
divide the proceeds between the central and local governments, 



STATE AND LOCAL tAXATlON 449 

as is done in Great Britain with the proceeds of the death duties. 
Fiscal convenience, evidently, is the controlHng factor, and not 
an automatic connection between governmental functions and 
sources of revenue. 

Taxes on corporations, particularly though not exclusively 
public-service corporations, are considered also to belong pecu- 
liarly to the states. If the taxes in question are confined to small 
annual payments for the franchise, as in New Jersey, I have no 
quarrel with the convenience of the arrangement. But if, under 
whatever guise or name, they are collected practically from 
property thereby withdrawn from local taxation, I deny that 
the arrangement is necessarily convenient or just. I do not 
question in the least the desirability and even necessity of the 
assessment of many kinds of corporations by state boards, or 
even the collection of corporation taxes by the states. But when 
a state appropriates to its own use the revenue from such sources, 
it is distributing the burden of state expenditures among the 
local units in proportion to the number and extent of the in- 
corporated enterprises in each district, and this process results 
in a hit-or-miss distribution that accords with no conceivable 
principle of justice. True, the taxable values of some corpo- 
rations, as railroads, are hard to localize; but this does not 
justify the state in assessing no tax upon districts not reached by 
railroads, a light tax upon localities where the roads occupy land 
of little value, and a tax of crushing weight upon a terminal city. 
It may well be that the tax should not be allotted wholly to the 
localities traversed by the roads — I cannot undertake in this 
paper a solution of the problem ; but I maintain that the state 
has no natural and necessary right to the entire tax, and that 
the proper solution must be distribution in accordance with fiscal 
needs, and not distribution in conformity to governmental 
functions. 

Many other examples might be given ; I have time to cite but 
a few. If I deposit money in a national bank in Cambridge, I 
am required to pay the regular local tax on such deposits ; but if 
I cross the street and place the money in a savings bank, the tax 
will be paid by the bank and appropriated for the use of the 
state. If Smith, Jones, and Brown form a partnership to conduct 
some form of mercantile business in Boston, they will pay a 
local tax on their merchandise and other stock in trade; but if 



450 SELECTED READINGS IN PUBLIC FINANCE 

they incorporate under the laws of the commonwealth, the tax, 
according to the advocates of separation, naturally belongs to 
the state and not to the city in which the business is carried on. 
Search as you will, you will find no necessary and natural con- 
nection between the action of the state in chartering' or regulat- 
ing corporations and the just allocation of taxes assessed on the 
property or business of incorporated companies. 

And the same is true of the other proposed sources of inde- 
pendent revenue for the use of the states. The controlling con- 
sideration always should be of a fiscal character, though in 
practice it is quite as likely to be political. The withdrawal of 
property from local taxation, either partly or wholly, merely dis- 
tributes the state taxes in proportion to the respective interests 
of the different localities in such property, and can give no 
assurance of a just distribution. . 

There remains the alternative plan that a substantial part of 
the state revenue be raised by a direct tax apportioned according 
to local expenditures or revenues. In support of this it is said 
that the amount of money expended for local government is a 
fair index of a community's wealth and of its ability to contrib- 
ute to the support of the state government. With individuals 
it would probably be admitted that expenditure is not a satis- 
factory index of ability, but with communities the case is thought 
to be otherwise ; and the further suggestion is made that a state 
tax apportioned according to expenditures would be a salutary 
restraint upon local extravagance. 

I must admit that when this proposal was first advanced it 
impressed me as attractive in many ways ; but I now believe that 
there is a better remedy for existing inequalities in the apportion- 
ment of state taxes, and that this method of distribution is unjust 
and in other ways undesirable. It is unjust because communities, 
like individuals, dift'er in need and in disposition to adopt a 
liberal scale of expenditure. Their needs differ on account of 
differences in situation and in the character of their population ; 
and to tax in proportion to expenditures absolutely necessary for 
public works, public schools, and protection to life or prop- 
erty, is to tax the more necessitous communities for the benefit 
of the more fortunate. Again, communities differ in their dis- 
position to provide improved forms of public service which 



STATE AND LOCAL TAXATION 451 

modern conditions make highly desirable. Better schools, im- 
proved highways, increased care for public health and sanitation, 
more intelligent and humane treatment of dependent, defective, 
and delinquent classes — these things are imperatively required 
by the conditions of our age; and to impose a larger share of 
state taxation on the communities that exhibit the most progres- 
sive spirit would be extremely shortsighted and objectionable. 
By so doing we might, indeed, curtail local expenditures, but we 
should certainly repress many desirable improvements in public 
service. Extravagance, no doubt, exists, and is always to be 
deplored; but I am not anxious to see it checked in any way 
except by improvement in the spirit and methods of government, 
and least of all by a method that taxes progressive communities 
for the benefit of unprogressive. For these reasons I hold that 
apportionment by expenditure would overtax the least fortunate, 
place a penalty on progress, and divert attention from the true 
method of dealing with local extravagance. 

To meet such criticism it has been said that, after all, the 
state taxes are comparatively light, so that the objection has 
little force. This is true in some states, as in Massachusetts, 
but is absolutely untrue in others where the outlay of the com- 
monwealth is a very large part of the total expenditure. It can 
be true in very few states that levy a state tax for the support 
of public schools ; and wherever such a levy is made, apportion- 
ment by expenditure would be likely to defeat the very purpose 
of the school tax, which is to equalize educational opportunities. 
Since another remedy can be found for existing evils, I believe 
that the proposed method of apportioning the state tax must be 
rejected without reservation or qualification. 

My second general criticism of the plan of separation is that 
it will not remove all inducements to undervaluation of property 
subject to local taxation, or lead automatically and surely to full 
and fair valuations. Abolition of the state tax or apportionment 
by expenditures would undoubtedly remove one inducement to 
undervaluation, but unfortunately there are others. First, there 
are the county taxes, which in the United States in the year 1902 
exceeded by 75 per cent the direct taxes levied for the use of 
the states and territories. There may be states in which conflicts 
of local interests do not arise within the separate counties, but 
in many, if not most, county assessments are now vitiated by 



452 SELECTED READINGS IN PUBLIC FINANCE 

the same forces that affect so unfortunately the apportionment 
of the state levy. In all such cases separation would hardly 
reach the roots of our present difficulties. A second reason for 
the continuance of local undervaluation is the fear of taxpayers 
that, if property is assessed at its true value, the ultimate result 
will be not a lower tax rate but larger 'expenditures and an 
increase in the actual burden of taxation ; and the experience of 
some communities that have raised valuations with a view to 
reducing tax rates lends some force to this apprehension. And a 
final reason is that the full and fair assessment of all property, 
even real estate, is not a simple task, as sometimes assumed, but 
a work requiring skill, experience, and freedom from political or 
personal influence. In the state of Wisconsin the opinion of the 
best judges is that the practical separation of revenues there 
accomplished has not affected appreciably the work of local 
assessors. The truth is that the evils of which complaint is made 
are more deep-seated than the advocates of separation have ever 
realized, and would not be removed by the plans they propose. 
But it is said that undervaluation, even if it were to continue, 
would not be a thing of much importance after the state tax 
had been abolished, since it would work no injustice between 
different counties. And, for local purposes, there is said to be 
no difference between a low valuation with a high tax rate and 
a high valuation with a low tax rate. This I believe to be a 
great mistake. In the first place, if the law now prescribes 
assessment at the true value, it should be either obeyed or 
amended; and boards of assessors who willfully disregard the 
statutes at one point are almost certain to violate them at others. 
Can the habitual disregard of laws relating to taxation be ad- 
mitted to be a matter of little moment ? And, in the second place, 
it seems clear that the true rule is assessment at the full value, 
if we wish to secure equality of individual assessments within 
the same community. Investigations have shown that when 
assessors, with the best intentions, undertake to undervalue all 
property at some uniform percentage, say 70 per cent, they will 
value some parcels of real estate as low as 20 per cent of the true 
value and others as high as 120 per cent. For this there is 
a simple explanation. If the practice is to assess realty at its 
true value, the assessor has a definite mark at which to aim, and 
the taxpayer a definite standard by which to compare his own 



STATE AND LOCAL TAXATION 453 

assessment with his neighbor's ; but when undervaluation prevails, 
the work is beset with uncertainty, the detection of errors is 
difficult, and glaring inequalities escape notice. 

Not only should local officials aim at a full valuation of tax- 
able property, but it is becoming increasingly clear that in this 
work they should have the advice, support, and, when necessary, 
compulsion of the state. Experience shows, both in this and 
other countries, that local assessments of property, income, or 
business need constant supervision and control by some central 
authority. I do not refer to mere "equalization" by boards of 
the old-fashioned type, but to genuine supervision, by commis- 
sions clothed with necessary authority over the methods and, 
when necessary, the details of local assessments. This raises a 
question too large to be considered adequately here; and I can 
only refer you to the work accomplished by such commissions 
in Indiana, Wisconsin, Minnesota, Washington, and a few other 
states, which has been described in various papers contained in 
the Proceedings of the International Tax Association. I am aware 
that centralization has its disadvantages as well as advantages ; 
I could even wish that in this case it were not necessary ; but I 
am convinced that local boards of assessors need to be supervised 
by a central body of experts, specialists in their appropriate field, 
and free from personal, local, or political influences. Instead 
of abandoning the effort to secure full and fair valuation, the 
duty of the state, after enacting a rational system of tax laws, 
is to insist upon the strict enforcement of those laws in letter 
and in spirit. This may be a difficult task ; it certainly will not 
be accomplished in a day. But this is no reason for discourage- 
ment, and certainly no excuse for taking what can plainly be 
seen to be a step in the wrong direction. 

The third criticism of the program of the separationists is 
that it would not put an end to diversity of local interests in tax 
legislation. At some points, I concede, it might do so; but at 
others the old antagonisms would remain, and would lead to 
most unfortunate consequences. For the independent revenues 
of the states must come from somewhere, and most of the special 
taxes which it is proposed to assign the commonwealths can 
be seen clearly to burden some localities more than others. All 
of the plans with which I am familiar would have for their net 
result the shifting of a considerable share of state taxation from 



454 SELECTED READINGS IN PUBLIC FINANCE 

rural districts to urban, and particularly to the larger urban 
centers. Indeed this is frankly avowed by leading advocates of 
separation, and considered to be one of the merits of the plan. 
Whether, in view of the problems confronting the modern city, 
such a result is desirable, I cannot now consider ; but the transfer 
of burdens must arouse the same local antagonisms that attend 
the apportionment of our present state taxes, and in the process 
city interests would be arrayed against country as they so often 
are in our legislatures and boards of equalization. 

In Massachusetts the problem of distributing the proceeds of 
the general corporation tax has for years arrayed the residential 
towns and cities against the manufacturing and commercial 
centers, principally the city of Boston. In Connecticut, during the 
past winter, it is reported that the problem of raising additional 
revenue for the state brought on a contest between city and 
country interests. In the state where complete separation has 
been accomplished, the division of the liquor-license tax and 
the enactment of a tax on stock transfers seem to have arrayed 
the virtuous and unselfish "up-state" counties against the wicked 
city of New York. If you will read the reports of tax commis- 
sions that have recommended plans for separating state and 
local revenues, you will find that although appeal is made to 
abstract justice or scientific principles of taxation, care is usually 
taken to construct statistical tables showing that a majority of 
counties, or towns and cities, will pay less under tlie new arrange- 
ment than under the old. And as for the average legislator, you 
may rest assured that, while he will cheerfully agree with you 
that what we want is fair play and a square deal all around, his 
first, and usually last, question will be. How does your scheme 
affect my district? Until you can devise taxes that come from 
nowhere and are paid by no one, you may depend upon it that 
the quest of new sources of state revenue ordinarily means a 
search for taxes that some other fellow^ or other district will 
have to pay, and that imposts of most objectionable character 
may be established if thereby a combination of town-s or counties 
can unload state charges on one or more large cities as convenient 
beasts of burden. If the time has come or ever does come when 
taxes resting upon country districts must be transferred to large 
cities, I submit that the transfer should be effected according 
to some rational principle, and not by the hit-or-miss methods 



STATE AND LOCAL TAXATION 455 

contemplated by the advocates of separation; and venture the 
further suggestion that we cannot expect to effect the change 
without arousing local jealousies and antagonisms. 

A fourth criticism concerns the proposal usually made by 
separationists to confer upon local governments freedom to 
devise their own systems of taxation. This is advocated by 
those who believe that taxes on personal property ought to be 
abolished, and think that if local option were permitted, some 
communities, perhaps many, would grant such exemption. It 
is favored also by our friend the single taxer, who hopes that 
some communities would elect to place all their taxes upon land 
values. Neither the merits of the single tax nor the desirability 
of exempting personal property can be considered in this paper ; 
I can only state my opinion that the remedy for the shocking- 
evils that now exist is to be found in a proper classification of 
property for taxation, coupled with state supervision of the work 
of assessment. From my own point of view, therefore, local 
option, or home rule in taxation, has no attractions ; and it must 
be still less attractive to those who believe that all property 
should be taxed at a uniform rate. 

The reason usually assigned for the proposal is that local 
conditions differ very widely, and that each community is the 
best, indeed the only, judge of its own needs. But I believe that 
there are few advocates of local optioQ who, after prolonged 
consideration of such diversities, would not in any concrete case 
recommend either total exemption of all personalty or the single 
tax. And I have often heard the opinion expressed that if any 
locality should hold out to investors the prospect of total exemp- 
tion of personal property, — to say nothing of exemption of 
improvements on land, — capital and industries would migrate to 
that district in such volume that other places would be forced to 
grant similar exemptions if they desired to retain any part of 
their movable wealth. I cannot, then, believe that the real pur- 
pose of most advocates of the plan is anything but the ultimate 
establishment of a uniform system of exemption of certain classes 
of property, and the concentration of local taxes on real estate or 
on land values alone. Such a program is difficult to carry through 
state legislatures where the farmers have a voice, but it might 
readily be accepted in large cities where only a small fraction of 
the voters are owners of real estate. Until we are prepared to 



456 SELECTED READINGS IN PUBLIC FINANCE 

accept state-wide uniformity in the concentration of local taxes 
upon real estate or land values, we are bound to oppose local 
option as a remedy for real or alleged diversities of local con- 
ditions and needs. 

If, however, I am wrong in believing that the purpose and 
possible result of local option is what I have represented it, and 
if the outcome of the experiment would be the establishment of 
diverse local methods of taxing many or most kinds of property 
and business, it is easy to show that such diversity, unless 
narrowly restricted by state law, would give rise to undesirable, 
even intolerable conditions. Suppose that one county should 
decide to tax mortgages as an interest in real estate where the 
land lies, that another continues to tax mortgages as personal 
property, and that the state, in its quest of independent revenues, 
establishes a recording mortgage tax. Then the interest the mort- 
gagee has in the land would be taxed in the first county, the 
mortgage note might be taxed in the second, and the state would 
impose a third tax at the time the mortgage was recorded. In 
the assessment of taxes on business enterprises owning property 
and conducting operations in two or more places, similar oppor- 
tunities would exist for double or multiple taxation; and other 
cases would probably arise in which similar injustice would be 
perpetrated. So far as I know, no country permits any such 
degree of local option, and the only result in the United States 
would be local chaos, assuming still that most forms of property 
and business would remain on the list of taxables. This is not 
to say that no latitude whatever should be allowed local govern- 
ments. Such a tax as the habitation tax, which does not affect 
the distribution of capital or offer opportunity for unjust double 
taxation, might be introduced, if any community desired it, in 
connection with other taxes ; and there may be one or two other 
taxes the use of which could safely be made permissive. But 
with such possible exceptions, the forms and methods of local 
taxation should be prescribed by state law, and few things 
could be more undesirable than the wide discretion it is proposed 
to grant local governing bodies. 

A fifth and final criticism lies against that form of separation 
which contemplates drawing all the revenue of the states from 
independent sources, without a direct tax of any sort or descrip- 
tion. To this the objection is that it leaves the states without an 



STATE AND LOCAL TAXATION 457 

elastic tax which can readily be increased when more revenue is 
needed, and reduced when a surplus is foreseen. Taxes on in- 
heritances ought to be levied at unchanging rates in order to 
secure equality in the distribution of their burden ; nothing can 
be more unequal than to tax at a high rate an estate probated 
in a year of a deficit, and to tax at a low rate one that is trans- 
ferred in a year that shows a surplus. Taxes on corporations 
are either levied at fixed rates, or at rates depending on the 
aggregate of local taxation. They might be made to vary with 
the needs of the commonwealth, but such a proposal would prob- 
ably encounter so much opposition as to postpone to the Greek 
Kalends a plan of separation contingent upon its acceptance. 
And so with the other sources of independent income; they 
should not, or probably could not, be made variable taxes. 

There may be states in which inelasticity of revenue would 
cause no embarrassment, — in which expenditures would not out- 
strip the natural increase of the income from established taxes, 
and in good years a surplus would be set aside to provide for 
the lean ones. This has been said to be true of New Jersey and 
Pennsylvania. But I apprehend that in most states the abolition 
^of the direct tax would remove a necessary check on public ex- 
penditures. Experience shows that legislative bodies will usually 
spend all the revenue drawn from indirect taxes or from taxes 
on inheritances and corporations, since these are not felt sensibly 
by the average taxpayer ; and in good years will regard a sur- 
plus merely as a reason for increased appropriations. This is not 
mere speculation. It has been, notoriously, the experience of 
our national government, and is confi.rmed by the experience 
of not a few states. 

For it should not be forgotten that during the first half of 
the nineteenth century separation of revenues was attempted in 
a number of states. The experiment has never been fully studied, 
and the results were complicated by the fact that at the same time 
extensive public works were undertaken with borrowed money. 
But I think it can be shown that in most cases, even when 
allowance is made for unwise use of public credit, the usual 
result of abolishing direct state taxation was an unprecedented 
increase in ordinary expenditures. My own state (Massachu- 
setts) affords a particularly good field for study, since the experi- 
ment was hardly affected by the use of loans ; and it is too clear 



458 SELECTED READINGS IN PUBLIC FINANCE 

to admit of doubt that from 1825 to 1853 the attempt to dispense 
with direct taxation resulted in loss of control over state outlay. 
Concerning the present working of complete or partial separa- 
tion in the states where it now prevails, I speak with diffidence, 
for I have been unable to study the situation at first hand. 
But it is a fact that in New York expenditures increased from 
$12,934,000 to $34,589,000 during the fifteen years ending in 
1908, and that, although opinions differ, there are well-informed 
persons who believe that abolition of direct taxation is responsi- 
ble for a considerable part of the increase. In New Jersey the 
condition of the state's finances was the subject of a special mes- 
sage from the Governor last January, and although that document 
denies that expenditures have been extravagant, it states that 
the condition of the treasury is such that the legislature ought 
either to appropriate to the use of the state certain revenues for- 
merly distributed to the counties or levy a direct tax. In Connecti- 
cut I find that during the decade ending in 1908 expenditures rose 
from $2,530,000 to $4,741,000, that the official best qualified to 
judge declares "the abolition of a direct state tax has led to ex- 
travagance in expenditure," and that the present year the legis- 
lature was obliged to levy a direct tax, the first since 1890. And* 
finally it is a significant fact that whereas the original proposals 
of the separationists contemplated the abolition of direct taxation 
for the support of the state, the plans now current usually provide 
for a direct tax apportioned according to local expenditures. 

Thus far, and not without regret, I have offered you little 
but destructive criticism. • I trust, however, you have not formed 
the impression that I am satisfied with existing methods of 
taxation, either state or local, or that I think there is no remedy 
for the evils admitted to exist. Will you permit me to state in 
the fewest possible words what I believe to be a wise and 
practicable solution of the problem? 

There are, undoubtedly, certain taxes which should be reserved 
for the use of the states. One of these is the inheritance tax, 
which takes from the localities nothing in the way of revenue 
which they formerly possessed and is collected with approximate 
equality from property in all parts of a commonwealth. A second 
may well be a light tax on the franchises of all corporations, 
which is a reasonable payment for something which the state 



STATE AND LOCAL TAXATION 459 

confers and is not in derogation of the taxing power of counties 
or municipalities. Third in order are the usual taxes on in- 
surance companies, which reach taxable values distributed with 
some approach to equality and never, so far as I recall, subject to 
local taxation. Further than this the question is less clear, 
though perhaps the states may reasonably claim a portion of the 
taxes collected from railroads and from telegraph, telephone, 
express, and parlor-car companies, since these fall in part upon 
intangible values hard to localize and belonging naturally to no 
one district rather than another. And finally, in view of their 
increasing outlay for dependents, defectives, and delinquents, 
the commonwealths may fairly claim part of the liquor-license 
taxes, since the business taxed contributes in some degree to the 
production of pauperism, disease, and crime. 

After this allocation of revenues to the states, the remainder 
of their income should be drawn from direct taxation. If, in any 
case, the revenue from the specified independent sources equals 
or exceeds the needs of the treasury, a larger part of the taxes 
on transportation companies should be assigned to counties or 
municipalities, in order that the legislature may not be freed 
from the restraints imposed by an annual or biennial accounting 
with the people. The apportionment of the state tax may not be 
an easy task, but an intelligent revision of our laws relating to 
the taxation of property will remove all serious difficulties. 

As the source of local taxation we must assign property and 
business generally, undiminished by the hit-or-miss reservation of 
important classes for the exclusive service of the state. But I speak 
not of a general property tax, levied as at present at a uniform 
rate ; for that has proved the abomination of abominations, and 
cannot be amended until we learn to classify property in a rational 
manner and adjust the rates and methods of taxation to the eco- 
nomic nature and needs of each class of taxable objects. The 
method of classification, I need hardly add, should be prescribed by 
the state ; and the process of assessment should be under strict and 
direct state supervision, though performed by local officials. The 
result, I believe, will be a reasonably full and fair assessment of 
taxable property ; not instantly, perhaps, since new methods are 
not learned perfectly in a day, but ultimately and at no distant 
time. It is obvious, too, that such a consummation will solve the 
problem of the just distribution of the direct state tax. 



46o SELECTED READINGS IN PUBLIC FINANCE 

56. A Classified Property Tax.^ — The classification of property 
for taxation is discussed in the following selection : 

The general property tax, which is in this country the main- 
stay of state and local finances, has been the object of incessant 
criticism for more than forty years. Discontent with its workings 
undoubtedly existed in the early part of the nineteenth century, 
but it was not until the period following the Civil War that state 
and local taxation acquired the status of a "problem." Between 
1867 and 1876 six states appointed tax commissions to investi- 
gate the subject, and their example has been followed by many 
others, until the student of taxation is now confronted by the 
reports of scores of such commissions, which constitute in the 
aggregate a literature of financial discontent without parallel in 
any other country. Everywhere the story is the same : existing 
laws are either unenforced, or, if enforced, prove destructive to 
industry and highly unjust in their operation upon individual 
taxpayers. The outcome usually is that personal property evades 
assessment to an increasing extent, so that the burden of taxation 
falls more and more heavily upon real estate. The system as a 
whole is inadequate, and was long ago discarded by most other 
countries; so that in the United States we have the proud dis- 
tinction of possessing about the worst methods of local taxation 
to be found in any part of the civilized world. 

Ever since discussion of the subject began, critics of the gen- 
eral property tax have maintained that our troubles arise from 
attempting to tax all, or substantially all, forms of property. 
Proposed reforms have generally contemplated the total exemp- 
tion of certain kinds of property, such as intangible wealth 
or even all forms of personalty, and the retention of taxes on 
real estate supplemented by corporation, inheritance, income, or 
business taxes. That a practicable system might be worked out 
in some such fashion, I will not question; but it must be ap- 
parent that the proposal to exempt important classes, not to say 
all classes, of personal property has thus far failed to gain the 
popular approval necessary for its adoption, and is not likely 
soon to command such approval. In view of this fact, I ventured 
a year ago to call the attention of this Association to the merits 

^ By Charles J. Bullock. Reprinted from Proceedings of the Natio?ial Tax Asso- 
ciatioji, Vol. Ill, pp. 95-105. 



STATE AND LOCAL TAXATION 461 

of a moderate uniform tax upon intangible property, such as now 
prevails in two of our commonwealths ; and I desire this year to 
carry the discussion a stage farther, and outline a general plan 
for a classified property tax. 

The root of our difficulty, I believe, is not that we have at- 
tempted to tax all classes of property, but that we have tried to 
tax them all at a uniform rate high enough to meet public ex- 
penditures at the present day. During the first half of the nine- 
teenth century, when expenditures were smaller and tax rates 
but a fraction of their present figures, the general property tax, 
while occasioning more or less friction, did not lead to the in- 
tolerable conditions that have existed since the Civil War. In 
my own state the average rate of taxation could not have ex- 
ceeded 40 or 50 cents per $100 in the year 1820; in Boston it was 
36 cents per Sioo in 1822. As late as i860 the general level was 
from 60 cents to $1 throughout the state, and in 1861 the average 
was approximately 83 cents. It is to be further observed that 
the rate of interest on good investments was considerably higher 
at that time than at the present day, so that a tax of 60 cents 
per $100 represented less, rather than more, than 10 per cent of 
the taxpayer's income : and the evidence shows that under such 
conditions the tax could be levied upon all property with 
reasonable success. 

In the city of Boston in 1794, when the rate of taxation was 30 
cents per $100, personal property constituted more than half of 
the total assessment; and as late as 1850, when the tax rate was 
65 cents per $100, it formed 41 per cent of the total valuation; 
but after 1850 conditions changed, public expenditures greatly 
increased, and the rate of taxation rapidly advanced. Whereas 
in Boston the per capita tax levied in 1850 was about $8, by 
1874 it had risen to $35.70. In the state of Massachusetts between 
i860 and 1870 the per capita taxes upon property increased from 
S6.04 to $17.10. The tax rate in Boston, which in 1850 had been 
65 cents per $100, advanced to $1.56 in the. year 1874; and in 
Massachusetts the average tax rate, which was 83 cents in. i86t, 
stood at $1.57 a decade later. The result of this great increase 
in rates was widespread evasion of taxes upon personal property, 
which brought it about that personalty thereafter formed but a 
small proportion of the total assessment, leaving the burden 
to fall chiefly upon real estate. It was under such conditions 



462 SELECTED READINGS IN PUBLIC FINANCE 

that Massachusetts appointed its first commission to investigate 
the working of its laws relative to taxation. 

While the situation may not have been the same in every other 
state, it appears that in the country at large the same thing hap- 
pened that occurred in Massachusetts. The census shows that 
the average tax rate in i860 in all the states was 78 cents, whereas 
in 1870 it was $1.98 and in 1902 was $2.05. It further discloses 
that in 1850 personal property throughout the United States was 
assessed at $2,125,000,000, and realty at $3,899,000,000; while in 
1902 personalty was assessed at $8,923,000,000, and realty at 
$26,415,000,000. The evidence points to the conclusion, there- 
fore, that it w^as mainly the progressive increase of tax rates after 
i860 which caused the disintegration of the general property 
tax and produced the intolerable conditions with which w^e are 
all familiar. 

Nor should this conclusion surprise us. While some forms of 
taxation may be more convenient and flexible than others, the 
most important thing about any tax is the proportion it bears to 
the income of the taxpayer. If this proportion is small, the 
burden is more cheerfully borne and the collection of a tax cor- 
respondingly easy ; while as it increases, the temptation to evade 
becomes stronger and the process of collection more difficult. 
I would by no means minimize the other considerations vvhich 
have contributed to the unsatisfactory working of the general 
property tax in the United States, but I believe the thing of 
greatest moment is the unparalleled increase of tax rates v/hich 
occurred during the last half of the nineteenth century. For 
forty or fifty years v/e have been endeavoring to collect from all 
classes of property a tax amounting to some such figure as 2 per 
cent of the selling value. Such a tax can and will be paid by no 
property that can manage to evade it, and its only effect must 
be to drive personalty into hiding and impose a constantly in- 
• creasing burden upon real estate. In the eighteenth century and 
early part of the nineteenth, when the tax rate was but 50 or 
60 cents per $100, it may have been possible to tax all property 
at a uniform rate ; at the present time, when the average tax rate 
is $2 per $100, it is absolutely impossible to do so ; and no reform 
of the property tax is possible until we learn that the rate of 
taxation upon any class of property should be ?djusted to what 
that class can bear. If we are to continue to tax property, as 



STATE AND LOCAL TAXATION 463 

apparently we must for a long time to come, it is under modern 
conditions imperative that we should classify property in a scien- 
tific manner and pass from a general to a classified property tax. 

A scientific method of classification must be based upon facts, 
and the first fact which it must recognize is that the heavy taxes 
needed at the present day to defray the increased cost of local 
government must fall chiefly upon real estate. This is actually 
the result of our present system, although it is reached through 
the devious channel of evasion of taxation by personal property, 
and not by the process of classification. In 1902 the total state 
and local taxes amounted to $860,600,000. Of this sum, $153,- 
900,000 came from miscellaneous taxes on polls, business, inheri- 
tances and corporations; while $706,700,000 came from taxes 
assessed on property. Of the taxes on property, as nearly as can 
be estimated, 75 per cent fell upon real estate, so that the total 
contribution of real property to the state and local revenues 
amounted to $529,000,000, out of a total of $860,600,000 raised 
by taxation. In reality, however, the contribution of real estate 
was somewhat larger, since a portion of the inheritance and cor- 
poration taxes represented realty values. In recognizing, there- 
fore, that the basis of a classified property tax must be a tax upon 
realty, I am not proposing so much a change in actual conditions 
as a different and better method of bringing such conditions 
about. Indeed, there is room for thinking that, by scientifically 
classifying personal property, the contribution it makes toward 
public charges may be somewhat increased so that a natural 
result of the change would be to diminish somewhat the actual 
burdens on real estate. 

Not only is it a fact that real estate is and must be the chief 
source of local revenues, but it is further true that under modern 
conditions this ought to be the case. Nearly nine-tenths of the 
taxes levied upon property in the United States are for the use 
of local governments, and little more than one-tenth are for the 
support of states and territories. The local taxes are expended 
in large measure for objects that tend to enhance or maintain 
the value of real property. Allow streets, sidewalks, and sewers 
to fall into decay, and you reduce real-estate values in any local- 
ity. Withdraw police and fire protection, extinguish street lights, 
and otherwise diminish municipal services, and you undo the 



464 SELECTED READINGS IN PUBLIC FINANCE 

owner of real property. Personal property can usually be re- 
moved or sold, so that its value will not be greatly affected ; and 
it is not, like land, the permanent beneficiary of municipal growth 
and development. It is but just, therefore, that real property 
should be taxed for local purposes at a higher rate than per- 
sonalty; and this principle is frequently recognized in special 
assessments levied by various American cities to defray the cost 
of certain kinds of improvements. 

The heavier burden which falls upon real estate is greatly 
alleviated by the fact that, whenever real property changes hands, 
existing taxes are capitalized, so that the purchaser buys upon 
what is practically a tax-exempt basis. Every buyer of real 
estate, at the time of his purchase, takes into account the taxes 
falling upon the property, and adjusts accordingly the price he 
offers. The result is that, at any time, the value of real estate is 
diminished by the existing taxes capitalized at the current rate 
of interest, so that these taxes are no real burden for the subse- 
quent purchaser. If the taxes increase during the time he holds 
the property, the additional burden of course falls upon him, 
since it diminishes by so much the price obtainable at the next 
transfer. In this manner from generation to generation the 
burden of real-estate taxation is diffused among successive own- 
ers, each of whom bears only such increases in the tax rate as 
occur during his period of tenure. 

While real estate must be the basis of the system, a classified 
property tax can draw substantial revenues from personal prop- 
erty if it rightly classifies the objects to which it applies. Per- 
sonal property has sometimes been considered to form a single 
class, and it has been proposed either to exempt it from all taxa- 
tion or to tax it at a uniform rate, though not at the rate levied 
upon real estate. But this ignores the well-defined distinction be- 
tween tangible and intangible personalty, a distinction which 
must be recognized by any reasonable scheme of classification. 

Intangible property is easiest of all to conceal or remove from 
one jurisdiction to another. It can be taxed successfully only 
by making the rate moderate and uniform throughout the widest 
possible area. For this reason it is desirable not only that the 
rate should be the same throughout an entire state, but that the 
various commonwealths should, so far as practicable, bring their 
rates to a common standard. In the next place, intangible prop- 



STATE AND LOCAL TAXATION 465 

erty consists of investments from which the owners on an aver- 
age derive but simple interest ; perhaps 5 per cent is a fair average 
in most parts of the United States. In a reasonable system of 
classification, then, it would seem that the rate for intangibles 
should not exceed such a figure as a government can collect 
with reasonable certainty from property that is easily concealed 
and yields only an income of 5 per cent. Experience shows that 
from 5 to 6 per cent of the income is a reasonable figure for any 
tax upon intangible wealth ; and that taxes exceeding this rate, 
by causing evasion, are less productive than those which do not 
exceed it. Pennsylvania and Maryland have learned this lesson 
and have demonstrated that a tax of 30 or 40 cents per $100 is 
the safe limit in the taxation of intangibles. 

Tangible personalty, on the other hand, consists either of per- 
sonal effects or of capital employed in agriculture, manufactures, 
and commerce. A tax upon personal effects bears no determinate 
relation to the taxpayer's income, and is of the nature of a tax 
on consumption. Capital actively employed in trade may be pre- 
sumed, on an average, to yield the ordinary trade profit, which 
is twice the rate of simple interest. It, therefore, can and should 
pay a higher tax than intangible property, and its tangible 
character makes the collection of such a tax possible. If 30 
or 40 cents per Sioo is the correct figure for the taxation of 
intangible wealth, it would seem that the tax on tangible per- 
sonalty should be placed at some such figure as 60 or 80 cents 
per $100. 

How such a limitation of the tax rate on tangible personalty 
would affect the revenue from this source cannot yet be ascer- 
tained from actual experience, as can be done in the case of the 
moderate uniform rate on intangible property. But it appears 
that throughout the country merchandise and manufacturing 
capital are greatly undervalued. Investigations have shown that 
the assessed value may not exceed one-half or one-third of the 
true value, and in the state of Ohio the assessment of "merchants' 
and manufacturers' stock" declined from $70,442,000 in 1870 to 
$52,446,000 in 1906. It would seem, therefore, that at the reduced 
rate of taxation the assessed value of this class of property might 
double or treble, and that the taxes collected might well equal the 
present revenue from such sources. And if it should be said that 
such a result would leave merchants and manufacturers about 



466 SELECTED READINGS IN PUBLIC FINANCE 

where they are to-day, the sufficient answer is that they would 
then be paying all the law requires, and would no longer be 
dodging their taxes. 

Since the classification of personal property is undoubtedly the 
crux of the problem, it may be well to emphasize the fact that 
the method I have proposed would give the same average result 
as a general tax on incomes. If we assume that the average 
rate of interest in any community is 5 per cent, and that the 
income tax is levied at the rate of 6 per cent, then $100 invested 
in intangible wealth will yield, on an average, an income of $5 
per annum and pay a tax of 30 cents; while $100 invested in 
manufactures or trade will yield an average trade profit of $10 
and pay a tax of 60 cents. If the rate of the income tax is 8 per 
cent, intangibles will, on an average, pay a tax of 40 cents, and 
capital invested in manufactures or trade, a tax of 80 cents. 
Clearly, if average results alone are considered, the result is 
the same whether the tax is levied on income or levied on prop- 
erty under a correct system of classification. In individual cases, 
it must be admitted, the results would differ, since all property 
of any given class is not equally productive. But for such dif- 
ferences in individual incomes from investments of the same class 
no property tax can make provision ; indeed, it is a commonplace 
with students of finance that such inequality is inherent in any 
method of property taxation. This may be, and in my opinion is, 
a sufficient reason for substituting income for property taxes 
whenever practicable ; but whenever such a change is impracti- 
cable, the most that can be expected is to adjust taxation to aver- 
age conditions, and that can be done only by some system of 
classification such as I have proposed. 

Forest property would also need to be dealt with in a scientific 
scheme of classification. In papers read at earlier meetings of 
this Association it has been made sufficiently clear that forests 
are unlike ordinary real estate and cannot be taxed in the same 
manner. The Forest Service of the United States is now investi- 
gating this problem, and w^ill be in a position eventually to recom- 
mend a scientific method of taxing forests. Since the problem 
is primarily one for the forest expert, I may be excused from 
making any definite suggestion concerning the taxation of forests, 
and refer to the subject merely for the purpose of emphasizing 
the need of a proper classification of property for taxation. 



STATE AND LOCAL TAXATION 467 

I am compelled to leave untouched many other questions that 
naturally suggest themselves, and must content myself with 
this brief discussion of the chief problems involved in a reason- 
able classification of property. I may refer, however, to the fear 
sometimes expressed that, if the rule of uniformity is abandoned, 
we shall fall into a chaos of diverse and bewildering classifica- 
tions. Such fear I believe to be groundless. Property falls into 
certain natural classes of which the economic characteristics are 
tolerably plain, and our legislatures would be decidedly averse to 
making classifications except for sufficient cause. Ordinary real 
estate, forests, tangible personalty, intangible property, — these 
classes are well established and recognized by all. Some others 
may need recognition — I do not profess to offer a final classifica- 
tion ; but experience shows that our legislatures are slow to diver- 
sify methods and rates of taxation, and that there is more danger 
that they will not go far enough than that they may go too far. 

We have been so long accustomed to a tax upon all property 
that the proposal to classify and adjust rates to the economic 
nature of each class gains acceptance but slowly, even though it 
is surely finding increased favor. It may help to overcome dis- 
sent if I suggest that nothing is here proposed that is inconsistent 
with accepted principles of legislation and business procedure. 

All successful legislation is based upon a reasonable discrimi- 
nation between the classes of things with which it deals, and laws 
that ignore necessary distinctions between classes prove ineffec- 
tual or pernicious in their results. Uniform regulations for the 
transfer of all classes of property, a uniform penalty for all 
crimes, and absolute uniformity in the treatment of persons, 
without discrimination of age, sex, or condition, would be no 
nTore unreasonable than a uniform rate of taxation for all prop- 
erty, irrespective of its nature or class. 

Diversification of rates of taxation agrees with the ordinary 
business principle of adjusting charges and prices to "what 
the traffic will bear." No railroad charges as much for carry- 
ing logs as for carrying furniture; but the discrimination in 
favor of logs, by enabling that traffic to move, contributes to the 
revenue of the road and decreases the charges upon furniture and 
other traffic of higher grade. When the average rate of taxation 
was 40 cents per Si 00, it was possible to tax all property at a 



468 SELECTED READINGS IN PUBLIC FINANCE 

uniform rate because the tax was not higher than any important 
class of property could bear; but under modern conditions the 
rate of taxation is so high that it is necessary to classify prop- 
erty and adjust methods and rates of taxation to the needs of 
each important class. 

Reasonable discrimination between the objects of taxation is 
the principle upon which our customs tariff and internal taxes 
upon commodities are now adjusted. We tax beer at one rate, 
spirits at another, and tobacco at another; and no sensible man 
would propose to tax all three commodities at a uniform rate. 
Our tariff taxes cut diamonds at the rate of lo per cent, and 
levies upon sugar a duty equivalent to 60 per cent ad valorem. 
This discrimination is both just and expedient, since a duty of 
60 per cent upon diamonds would lead to so much smuggling as 
to produce little revenue ; while the duty of 10 per cent yielded, 
in 1905, $2,500,000. This illustration not only makes clear the 
necessity of adjusting taxation to ''what the traffic will bear," 
but points to the reason therefor. The duty of 10 per cent can 
be collected from any dealer in diamonds, because the govern- 
ment succeeds in collecting it from practically all dealers. If the 
duty were raised to 60 per cent, and a few dishonest dealers were 
tempted to evade payment of it, the honest dealers, who would 
have no objection to paying duties uniformly collected upon all 
persons engaged in their trade, would have no choice but to 
resort to smuggling or go out of business. Evasion of taxation, 
when it becomes general, is not due to dishonesty on the part of 
the average 'taxpayer, but to the sheer inability of the honest 
man to pay his taxes when other persons succeed in evading theirs. 

Not only in the indirect taxes levied by the national govern- 
ment, but also in the taxes levied in certain states upon deposits 
in savings banks can we find a noteworthy illustration of the 
advantage of adjusting taxation to what property will bear. 
In 1862 Massachusetts made deposits in savings banks subject 
to an excise duty which for many years has been nominally one- 
half of I per cent, and actually one-fourth of i per cent of the 
total deposits. This duty has been collected from banks, and 
there has been no possibility of evasion, yet the deposits in those 
institutions have increased very much more rapidly than any 
other class of taxable property in the state, with corresponding 
benefit to the revenue derived therefrom. Far from injuring 



STATE AND LOCAL TAXATION 469 

owners of other classes of property, the moderate tax upon sav- 
ings deposits in Massachusetts and some other states has greatly 
benefited them, and their taxes would to-day be higher than they 
are if we had undertaken to collect a tax of 2 per cent. 

Then, finally, we have the experience of Maryland and Penn- 
sylvania, with their present taxes on intangible wealth. Their 
experience has shown that a rate that can be collected is far 
more productive than a higher rate that cannot be enforced, and 
they have pointed out a way to remove some of the worst abuses 
in our system of local taxation. We have had, then, even in this 
country, some practical object lessons of the benefit of classifica- 
tion, so that the proposal I make finds a basis in experience as 
well as in reason. 

The platform of this Association commits us to the policy of 
removing obsolete constitutional restraints upon the classification 
of property for taxation, and has further recognized the impos- 
sibility of taxing forests under the general property tax. Our 
action gives rise to the natural question. Whither are we moving, 
and where are we likely to come out ? May I suggest that we are 
tending toward a classified property tax, under which both rates 
and methods of taxation will be adjusted to the needs of each 
class of property. In such a system no rate upon any class will 
be higher than can be collected with reasonable certainty ; none 
will be so high as to drive out of a community persons or capital or 
industry ; and it will be recognized that any rate exceeding what 
the property will bear must result in loss of revenue, injury to 
industries, and such general demoralization as accompanies wide- 
spread evasion of law. If wq move in this direction, may we not 
devise a system of taxation suited to the conditions of modern 
life, just in its operation upon individuals, and beneficent in its 
effect upon the industry and commerce of our common country ? 

57. The State Income Tax and the Classified Property Tax.^ — 

The following selection deals with later developments in the 
taxation of property and income: 

During the past decade two plans for the reform of state and 
local taxation have gradually forced themselves to the front : 
the classification of property and the substitution of income for 

1 By Charles J. Bullock. Reprinted from Proceedings of the National Tax Asso- 
ciation, Vol. X, pp. 362-384. 



470 SELECTED READINGS IN PUBLIC FINANCE 

property taxes. Both have now passed beyond the stage of mere 
discussion, and have been subjected to the acid test of experience. 
Both have a record of successful achievement, but neither can 
claim to have solved all taxation problems. Both have advocates 
and both have critics. It would seem, therefore, that the time 
has come when a comparative study of the classified property and 
state income taxes can be profitably undertaken. 

The classified property tax was first in the field. When it was 
seen to be impossible to enforce the uniform taxation of all 
classes of property at the high rates prevailing in the United 
States, it was natural that some of the commonwealths should 
diversify their practice by classifying some kinds of property 
for taxation by special methods and at lower rates. Prior to the 
present decade this was undoubtedly the line of least resistance 
for the average state. Our people had always been accustomed 
to the taxation of property, and were inclined to regard the in- 
come tax as inquisitorial. Then, too, taxation of incomes had 
been tried by a few states, and had always proved a signal 
failure; so that it had come to be generally agreed that the 
states could not, and should not, impose taxes upon incomes. 
Prior to the discussions attending the ratification of the sixteenth 
amendment of the Federal Constitution, the income tax would 
have been the line of greatest resistance in the average state. 
But the coming of a federal income tax and the successful in- 
auguration of a state tax on incomes by Wisconsin have wholly 
changed the situation. Oklahoma and Massachusetts have re- 
cently enacted income taxes. New York has had such a measure 
under consideration, Connecticut has imposed an income tax on 
certain classes of corporations, and much interest has been 
aroused in several other states. To-day the income tax appears 
to enjoy at least a large measure of popularity, and may prove in 
many states to be the most practicable method of remedying the 
evils of the general property tax. 

Comparative study of the two plans of taxation requires first 
of all some consideration of the results so far achieved, and I 
begin with the classified property tax. 

Intangible property is now classified for taxation at flat rates, 
ranging from two to five mills in the dollar, in <:Ak states : namely, 
Pennsylvania, Maryland, Minnesota, Iowa, Rhode Island, and 



STATE AND LOCAL TAXATION 4; I 

North Dakota/ In the last state the law is of such recent date 
that no statement about the results is possible; but in all the 
others except Iowa the flat tax has been a financial success. In 
Iowa the experiment was made under the worst possible adminis- 
trative conditions, and the immediate result was a loss of revenue, 
though not so large as has been represented by opponents of 
the flat tax; but subsequently the assessment of intangibles 
materially increased, and the present prospect is that, even under 
unfavorable conditions, the new law will give a better financial 
result than the old. 

To form a just estimate of the working of the flat tax it is 
very necessary to observe the exact scope of the tax in each state 
before making comparisons with others. This the few critics 
invariably fail to do. Not all kinds of intangible property are. 
subject to the flat tax in any of the six states. Stocks of domestic 
corporations are everywhere exempt from it, savings deposits 
are often if not always exempt, mortgages on domestic real 
estate are exempt in Minnesota and Maryland, stocks of foreign 
corporations are exempt in Minnesota, intangibles yielding no 
income are exempt in Maryland, and there has been some ques- 
tion as to whether bank deposits are taxable under the Pennsyl- 
vania law. Under these circumstances comparisons are difficult, 
and I cannot undertake them in this paper. It should suffice that 
those conversant with the facts in Pennsylvania, Maryland, 
Rhode Island, and Minnesota testify that the financial results are 
good, and that the revenue from this source tends steadily to 



1 In 1915 Virginia imposed a state tax of 65 cents per^ioo upon intangible 
property and limited local levies to 30 cents, with the result that the maximum 
rate on intangibles is now 95 cents per ^100, or nine and one-half mills. I am not 
sufficiently informed about the results of this legislation to justify an expression 
of opinion on the subject. In 1916 a 4-mill tax on intangibles was established in 
the District of Columbia, where such property had been exempt from all taxation 
since 1903. 

2 Criticisms of the flat tax can be found in Professor Seligman's address in 
the Proceedings of the N'inth Annual Confe7'ence of the National Tax Associaiiojt, 
pp. 126-145 ; report of the Committee on Taxation of the City of New York, 1916 ; 
and report of the Joint Legislative Committee on Taxation of the State of New 
York, 1916. Professor Seligman's criticisms were answered by various delegates 
to the Ninth Conference. See Proceedings, pp. 226-237 ; also article by Professor 
Brindley in Quarterly fournnl of Economics, May, 1916. Cf. the current reports of 
the Rhode Island, Maryland, and Minnesota Tax Commissions for full informa- 



472 SELECTED READINGS IN PUBLIC FINANCE 

Another consideration which the critics have always missed 
is that the introduction of the flat tax on intangibles tends to 
improve greatly the assessment of tangible personal property. 
This has been notably the result in Maryland and Rhode Island, 
and seems to be true in Minnesota. We can therefore say that 
the flat tax not only increases the revenue from intangibles, but 
indirectly contributes to produce an increased assessment of 
tangible personalty, and consequently a larger revenue from that 
class of property. 

But while the tax has been, upon the whole, a distinct success, 
there is room for improvement both in details of the law and 
methods of administration. The rate of 5 mills now imposed by 
Iowa is probably higher than the average state can at present 
expect to collect with reasonable certainty, and upon the other 
hand the 2-mill rate imposed by North Dakota is lower than it 
should be. For the average state 3 mills is probably the best 
rate, and 4 mills is certainly the maximum. 

Improvement is possible also in the provisions made for de- 
ductions on account of indebtedness. In some of the states, as 
Rhode Island and Iowa, debts of any description can be offset 
against taxable credits, with the result that we find unlimited 
debt deduction from a limited class of property. Minnesota goes 
to the other extreme and permits no offset of debts. In the first 
case the revenue from the flat tax suffers, and in the second con- 
siderable hardship to the taxpayer may occur. Both difficulties 
might be obviated by adopting the principle of proportional 
deduction of debts, which has been followed in the Massachusetts 
income tax. Taxpayers might safely be permitted to deduct from 
the value of their taxable intangible property such a proportion 
of all their debts as the amount of their taxable intangibles bears 
to their total property. This would, indeed, require persons 
seeking deductions to make a return of all their property, but 
only as a condition of receiving a privilege. It would avoid the 
absurdity and abuses incident to permitting unlimited debt deduc- 
tion against a limited class of property, and at the same time 
obviate the cases of hardship arising from refusal to grant any 
deductions whatever. 

tion concerning those states; also the reports of the Joirt Committees of the 
Senate and House of Representatives of Pennsylvania to consider the Revenue 
Laws of the Commonwealth, appointed under resolutions of 1909 and 191 1. 



STATE AND LOCAL TAXATION 473 

Better administration also is needed in most of these states. 
Minnesota from the start gave the state tax commission adequate 
supervisory power in the premises, and has achieved gratifying 
success ; but the work of educating local assessors has proved a 
difficult task, and is far from completed. In Iowa, on the other 
hand, the taxation of intangibles was left wholly to local boards 
of assessors, with such results as might have been expected. 
Maryland and Rhode Island are accomplishing much through 
their tax commissions, but in many localities the assessors seem 
still to be a law^ unto themselves. Pennsylvania exercises, through 
the auditor general, some slight control over the local author- 
ities, but has not yet established methods of administration that 
promise to become generally effective. Intangible property can- 
not be successfully taxed by unskilled and underpaid boards of 
local assessors, and the successful working of the flat tax requires 
strict central control over the entire process of assessment.^ 

Instead of resorting to a flat tax on intangibles, some states 
have preferred to employ registration taxes. Connecticut led the 
way in 1889 by permitting owners of bonds or other choses in 
action to register them with the state treasurer and secure exemp- 
tion for five years by paying a tax which is now fixed at 2 per 
cent, or, disregarding interest, 4 mills per annum. Since regis- 
tration was purely voluntary and local assessors have made little 
effort to tax intangibles under the general property tax, com- 
paratively few people have had any motive -to register their 
securities ; yet the tax has yielded a substantial revenue to the 
state. In 191 5 legislation was enacted providing for the better 
enforcement of the tax, with what result time will disclose. In 
1903 Alabama imposed a recording tax upon mortgages in lieu 
of taxation under the property tax, and subsequently her example 
was followed by New York and several other states. In 191 1 
New York, later followed by Michigan, imposed a registration 
tax, somewhat after the Connecticut plan, upon secured debts. 

These registration taxes, provided their rates are adjusted to 
the period of exemption, are obviously another method of reach- 

1 Since it has been supposed that I have maintained that mere reduction of 
the rate of taxation will secure a full assessment of intangibles, I wish to call 
attention to the fact that in my first discussion of the subject I recognized fully 
the need of proper administrative methods. See Proceedings of the Second Aiimial 
Conference of the National Tax Association^ p. 132. 



474 SELECTED READINGS IN PUBLIC FINANCE 

ing the same result as the flat tax on intangibles. The 2-per-cent 
tax levied by Connecticut upon bonds which are exempted from 
taxation for five years amounts to practically the same thing as 
the 4-mill tax levied annually by Rhode Island upon intangible 
property. In states where there is deep-seated opposition to what 
is called "the listing system," the Connecticut plan may be for 
the present the line of least resistance or even the only way out. 
But when, on the other hand, the registration tax is payable once 
for all, at a rate that is the same for obligations having one or 
one hundred years to run, it becomes unequal in its incidence, and 
for long-term bonds amounts to an exemption rather than a taxa- 
tion measure. A registration tax of $5 for a $1000 bond having 
fifty or one hundred years to run can be understood if it is 
regarded as the nearest practicable approach to total exemption, 
but as a tax it is too absurd to admit of discussion. In fact the 
chief advocates of such so-called taxes are persons who hold that 
intangible property ought not to be taxed at all. Even when the 
rate is graduated according to the life of the obligation, it seems 
clear that an optional registration tax, though accompanied by 
penalties upon unregistered securities disclosed in the probate 
courts, cannot reach intangible property as fully and certainly 
as an annual tax of reasonable amount under proper conditions 
of administration. 

Tangible personal property continues in all the states, except 
Minnesota, to be taxed like real estate. Yet it would seem that 
in a proper scheme of classification this kind of property should 
be segregated and taxed at a special rate. It consists, for the 
most part, of merchandise, machinery, and live stock, property 
which may be assumed to be employed in trade and to yield an 
ordinary trade profit which may be taken to be about 10 per cent. 
From property of this description, which is mobile and subject 
to severe interstate and even international competition, it is 
doubtful if any of our states ever has collected, or can expect to 
collect, taxes that absorb more than 10 per cent of the income. 
Since $100 of such property may be assumed to yield an average 
income of about $10, the proper tax rate would be 80 cents or 
$1 per $100; but the rates prevailing in our states are usually 
double these figures. The result is general undervaluation, by 
which tangible personalty as a class is assessed at from 30 to 60 
per cent of its true value, while in individual cases assessments 



STATE AND LOCAL TAXATION 475 

range from nothing up to too per cent, producing the grossest 
inequaUties between taxpayers. The introduction of better 
methods of taxing intangible property has indeed simpHfied and 
improved somewhat the taxation of tangible personalty, and the 
efforts of efficient state tax commissions have changed things 
for the better; but the problem has not been solved. 

For manufacturing and commercial states the question is one of 
the greatest importance. In these commonwealths public expen- 
ditures are usually heavy and tax rates are high. Strict en- 
forcement of a tax amounting to $1.50 to $2.50 per $100 would 
not be long tolerated by public opinion, since it would drive so 
much business to other states. The rational/ expedient, and 
straightforward thing to do is to reduce the tax to a figure that 
can be collected, and then enforce the law in all cases without 
fear or favor. When expenditures are small and the general tax 
rate does not equal or exceed $1 per Sioo, the matter may not be 
of great importance ; but elsewhere the proper classification of 
tangible personal property is becoming increasingly desirable 
and necessary.^ 

Time does not permit me to develop this topic as I should like 
to do, but I may point out that a precedent for such limitation of 
the tax rate on tangibles can be found in the taxes levied by 
New York, California, and Connecticut upon banks at the flat 
rate of i per cent. While these are legally taxes upon bank stock, 
they are economically and practically taxes upon a form of com- 
mercial capital analogous to the capital of manufacturers and 
merchants. Just what the financial result of such rate limitation 
would be cannot be stated with any degree of certainty, but it is 
probable that tangible personalty, as a class, is so far undervalued 
that a full assessment at the lower rate would produce about as 
much revenue as is secured to-day. 

Real estate also is sometimes classified for taxation.^ No less 
than six states- have adopted new methods of taxing forest 
lands, which recognize more or less fully the need of replacing 

1 This point was considered in my paper entitled " A Classified Property Tax," 
in the Proceedings of the Third Anmial Conference, pp. 100-102. 

2 I omit here classification of suburban land such as has long existed in some 
localities. 

3 Vermont, Massachusetts, Connecticut, New York, Pennsylvania, and 
Michigan. 



476 SELECTED READINGS IN PUBLIC FINANCE 

the tax upon growing timber by a tax upon the product. The 
exemption of buildings, or taxation at a reduced rate, has been 
advocated by single-taxers and some others in a number of states, 
but so far Pennsylvania is the only commonwealth that au- 
thorizes this, and its law applies only to the cities of Pittsburgh 
and Scranton. 

Another interesting and important tendency is the remarkable 
extent to which special assessments have been developed in some 
localities. When not only the original construction of streets, 
but also the cost of successive resurfacings or repavings which 
virtually relieve cities of ordinary maintenance expenses, are 
financed by special assessments, such contributions become recur- 
ring charges which must be regarded as special land or real- 
estate taxes. Even in older states, like Massachusetts, assessments 
are now levied to cover such recurring expenses as street-watering 
and the destruction of insect pests. It is not impossible that in 
these, and perhaps other, ways special assessments may develop 
into a new form of special land or real-estate taxes, even in states 
having constitutions that require taxation to be uniform or 
proportional upon all classes of property. 

Only one state, Minnesota, has undertaken as yet to establish a 
general scheme of classification of property for taxation. In 
that commonwealth a law enacted in 1913 provides that property 
shall be divided into four classes. Iron ore, which constitutes a 
class by itself, is assessed at 50 per cent of its actual value ; urban 
real estate, which constitutes another class, is assessed at 40 per 
cent ; rural real estate and such tangible personalty as live stock, 
merchandise, and machinery form another class, and are assessed 
at 33^/3 per cent ; while, finally, household goods, wearing apparel, 
and similar personal belongings are assessed at 25 per cent. 
Since intangibles were already provided for, this class of prop- 
erty was omitted from the law. 

This scheme of classification was very largely based upon the 
antecedent conditions existing in the state, and amounted virtually 
to a legalization of those conditions. It made possible a far better 
assessment of property in 1914 than had ever before been secured, 
and has therefore greatly improved conditions in Minnesota. 
Concerning it the Tax Commission of the state has said: ''From 
a theoretic standpoint it is open to very sericus criticism and 
leaves much to be desired; but as a measure designed to ac- 



STATE AND LOCAL TAXATION 477 

complish a practical and much-needed reform, it has proven a 
most pronounced success."^ With this opinion I heartily concur. 
Other states can learn from Minnesota's experiment the great 
advantage that accrues from having property assessed in con- 
formit}^ with the law rather than according to standards estab- 
lished by local authorities in defiance of the law. But the plan 
of assessment at fractional valuation is in some respects un- 
fortunate, and the classification of the difi^erent items of property 
is at some points open to criticism. 

Classification by fractional valuation has, indeed, the advan- 
tage of giving the taxpayer a direct interest in the rate of taxa- 
tion, which is lost when classification is brought about by 
imposing a flat rate. But upon the other hand it is less likely to 
result in equal valuations than the alternative plan of taxing 
property upon its full value at a reduced rate. I understand that 
the Minnesota Commission requires assessors to record the true 
value in all cases, and that the fractional valuation is then com- 
puted for the purpose of determining the tax. But, even so, the 
public knows that the law provides for undervaluation ; and when 
cases of unequal assessment occur, is less likely to take notice of 
them. If the law requires assessment at true value, and a parcel 
of real estate assessed at $6000 is sold for $10,000, the discrepancy 
is glaring enough to excite comment and perhaps action. But if 
the law provides for assessment at 40 per cent, and a parcel as- 
sessed at $2400 is sold for $10,000, the discrepancy is less glaring 
and less likely to lead to correction of the valuation. Under any 
other plan than that of full valuation, inequalities are not so 
apparent to the public and not so keenly appreciated, and every- 
thing depends upon the vigilance and skill of the assessor. Per- 
haps this ought not so to be, but it is a psychological fact with 
which tax legislation ought to reckon. 

The classification accorded to some kinds of property by the 
Minnesota law is at some points questionable and at others clearly 
wrong. Unplotted real estate is assessed at 33/^ per cent, other 
real estate at 40 per cent, and iron ore at 50 per cent. This 
arrangement brings it about that urban realty is taxed about 20 
per cent more than rural for direct state and county taxes, and 
that iron-ore lands are taxed 50 per cent more than rural and 20 
per cent more than urban real estate. How such discrimination 
1 Report for 1914, p. 23. 



4/8 SELECTED READINGS IN PUBLIC FINANCE 

can be justified is not apparent, and it is hard to explain except 
upon the ground that farmers are numerous in Minnesota and 
that the ore lands belong to corporations the stockholders of 
which are chiefly residents of other states. In practice the higher 
valuation of ore properties has contributed to produce extrava- 
gant expenditures in the iron districts, and in theory it must be 
condemned. 

By providing that live stock, machinery, and merchandise shall 
be assessed at 33/3 per cent the Minnesota act moved in the right 
direction, but did not go far enough. This means that the true 
rate of taxation upon machinery and merchandise is 80 per cent 
of that imposed upon urban real estate, and in the long run is 
likely to mean a tax so heavy as to be incapable of strict enforce- 
ment. With an average nominal tax rate of about $3 per $100, 
tangible personal property to-day is actually paying at the rate of 
$1 per Sioo, which, though high, is probably not excessive under 
proper conditions of administration. But if the future increase 
of public expenditure raises tax rates above the present figures, 
the Minnesota classification plan will encounter increasing diffi- 
culties in the taxation of tangible personal property. This danger 
can be readily met, however, by reducing the percentage at which 
such property is assessed, or, better still, by limiting the rate 
of taxation. 

I have dwelt at such length upon the recent Minnesota law 
because it is the first which undertakes to establish a general 
scheme of classification and is therefore of peculiar interest and 
importance. If the discrimination against certain kinds of real 
estate were removed, and the assessment of tangible personalty 
reduced to the right proportion, Minnesota would have the dis- 
tinction of working out a correct scheme of classification, and 
would blaze a path for the other states. 

The recent history of state income taxes may be more briefly 
told. Prior to 1912 some sixteen states had attempted at various 
times to tax incomes ; but the results were invariably farcical, 
and it had come to be the general opinion that no state could or 
should levy an income tax. This opinion, however, was based 
upon a superficial view of the case. State income taxes had, 
indeed, failed everywhere ; but they had always been part of an 
unworkable system of taxation, and had been tried without suit- 
able machinery for administering them. The experience of the 



STATE AND LOCAL TAXATION 479 

states taught conclusively that, under such conditions, income 
taxes could not be enforced; but that is all it demonstrated. 
Under totally different conditions it was at least conceivable that 
there might be a different result. 

So, evidently, Wisconsin thought when in 191 1 she obligingly 
came fo'rward with an object lesson. By a well-considered law, 
enacted in that year, this state levied, at reasonable, progressive 
rates, a tax upon incomes of individuals and corporations ; and 
then exempted from local taxation intangible property, farm 
machinery, and household goods. I cannot consider in detail 
the structure of this tax or the manner in which it is adjusted 
to certain state taxes upon corporations ; for present purposes its 
important features are, first, that it imposes a tax of reasonable 
amount; second, that it is in lieu of other taxation of intangible 
property ; and, third, that it is administered by special assessors 
of incomes who are appointed and controlled by the state tax 
commission. Had it been a tax of 30 or 40 per cent of the tax- 
payers' incomes, had it been superimposed upon the old method 
of taxing intangible property, and had its administration been 
left wholly to the local assessors, the Wisconsin tax would have 
gone the way of previous state income taxes. But Wisconsin did 
none of these things, and instead established new conditions 
under which the tax has operated with most gratifying success. 

The Connecticut act of 1915 applied to ordinary business cor- 
porations, and imposed a tax of 2 per cent upon the net incomes 
in respect of which such corporations are required to pay a tax 
to the United States. Administration of the law was placed in 
the hands of the state tax commissioner, and the companies were 
required to file with him copies of the income returns made to 
the federal government. In 1916 the yield of this tax exceeded 
expectation, and it is not impossible that presently the scope of 
the law will be broadened. 

Concerning the recent Oklahoma law I am not fully informed ; 
but it appears that the act superimposed an income tax upon the 
general property tax and did not exempt intangibles from other 
taxation. Administration of the tax was placed in the hands of 
the state auditor, who w^as not furnished with a force of special 
assessors of incomes such as had been provided in Wisconsin. 
The result, therefore, has been far from satisfactory, as might 
have been expected under the conditions. 



480 SELECTED READINGS IN PUBLIC FINANCE 

The law enacted in Massachusetts last spring is narrower in 
scope than either the Wisconsin or Oklahoma acts. It continues 
in force the old tax upon incomes from professions, employments, 
trade, and business, which in one form or another has existed for 
two hundred and seventy years ; and then imposes a tax upon 
income from intangible property which is exempted from other 
taxation. It also imposes a tax upon speculative profits derived 
from dealings in intangible property. Finally, its administration 
is placed in the hands of the state tax commissioner, who is pro- 
vided with all the machinery — including district assessors of 
income — needed for the enforcement of the law. It will, there- 
fore, be tried under comparatively favorable conditions, and 
ought to prove a solution of the problem of taxing intangible 
property. I should state, however, that, under the old system, 
Massachusetts has probably taxed some $500,000,000 or $550,- 
000,000 of intangibles, a much larger amount than any other 
state seems to have reached under the general property tax. It is 
hardly to be expected, therefore, that the immediate results of the 
new law will be as spectacular as those achieved in Baltimore, 
or in Minnesota and Rhode Island, upon the introduction of 
the flat tax on intangibles, or in Wisconsin under the income tax. 
The law goes into effect in 191 7. 

Meanwhile Virginia, North Carolina, and South Carolina re- 
tain the income taxes which have long stood on their statute 
books, and from time to time seek to give increased vigor to them. 
But neither state has made the radical changes necessary for the 
successful operation of an income tax, and so neither has suc- 
ceeded in reaching more than a fraction of the taxable incomes. 
In New York the need of additional revenue is likely before long 
to result in important changes in the tax laws, and a state income 
tax has been recommended by a legislative commission. Else- 
where the movement toward state taxation of incomes has not 
advanced beyond the stage of preliminary discussion, and does 
not claim our attention. 

I now come to the important question of the merits of the 
classified property and the state income taxes, which can be 
best treated by making a somewhat detailed comparison of the 
two imposts. 

The normal source of taxation is and always must be income. 



STATE AND LOCAL TAXATION 48 1 

A property tax, whether general or classified, is merely one 
method of determining what part of his income the individual 
citizen should contribute, and it takes as the measure of the 
citizen's contribution the amount of property that he owns. The 
income tax is merely another method of doing the same thing, 
so that we can say that fundamentally the two taxes differ merely 
in the measure, or if you please the yardstick, which they use in 
determining the amount of the citizen's contribution. So far as 
the owner of productive property is concerned, it is really im- 
material to him what name is given to a tax of stated amount. 
To the owner of intangibles yielding 5 per cent a 3-mill tax in 
Minnesota is exactly the same thing as the 6-per-cent income tax 
imposed upon large incomes in Wisconsin. If we are to escape 
bondage to mere words, names, and labels, we must not regard 
a property tax as fundamentally bad and an income tax as funda- 
mentally good ; or vice-versa. Basically the two taxes are merely 
different methods of doing the same thing, that is, levying upon 
the income of the citizen ; and what we need to know is which 
tax gives the better results. 

The second point to be noted is that the manner in which either 
a property or income tax works depends very largely upon the 
rate of taxation. A property tax levied at a rate that absorbs 
30 or 40 per cent of the taxpayer's income is, in ordinary times, 
incapable of strict enforcement in respect of any kind of property 
that can be hidden or moved to another jurisdiction, as we in the 
United States know full well. The same thing precisely is true 
of an income tax, in ordinary times ; and it is a commonplace that, 
as a tax upon incomes rises above the rate of 10 per cent, it 
becomes increasingly difficult to collect. Upon the other hand, a 
property tax levied at the rate of 30 or 40 cents per $100 is just 
as enforcible as an income tax levied at the rate of 6 or 8 per cent, 
as the experience of some of the Swiss states and the history of 
our own flat tax on intangibles fully demonstrate. Just as a 
chain is no stronger than its weakest link, so property and income 
taxes are no stronger than they prove to be in respect of things 
not visible or tangible and capable of ready removal. A general 
income tax levied as the general property tax is levied in Amer- 
ican states would produce exactly the same results. Under it 
real-estate incomes would pay the bulk of the taxes, and other 
incomes in the long run would largely or wholly escape. The 



482 SELECTED READINGS IN PUBLIC FINANCE 

appropriate remedy, in such a case, would be classification of 
incomes, in order to adjust the rate im'posed upon any class to 
the situation and needs of that class. 

In the third place it is evident that conditions of administra- 
tion are about as important as the rate of taxation in determin- 
ing the success or failure of property and income taxes. Under a 
purely local system of administration there never was and never 
will be a generally satisfactory assessment of either income or 
property, for reasons perfectly familiar to us all. Central control 
of the process of assessment is necessary for the successful 
operation of either a property or an income tax, and hardly more 
so for the one than for the other. 

A fourth point of comparison is that of the fairness or equality 
wath which the two taxes operate. It is often said that a prop- 
erty tax is unequal because property is not equally productive. 
One investment of $1000 may yield 10 per cent, another 4, and 
another may for the time being yield nothing ; yet the property 
tax exacts the same contribution in all three cases, if the market 
value of the property is the same, as it may happen to be. The 
income tax, upon the other hand, proportions the contribution to 
the income that each investment yields, and is therefore much 
more equal. This argument is plausible, but it overlooks one im- 
portant feature of the case. An investment that yields 8 per cent 
upon the market value involves more risk than one which yields 
4, and therefore a part of the higher interest is not net income but 
a premiimi for risk. The purchaser of 6-per-cent securities must, 
if he wishes to keep his principal intact, allow for a larger per- 
centage of losses than one who buys 4-per-cent bonds. Now the 
income tax makes no adequate allowance for this fact. Even if 
it permits taxpayers to deduct losses as they occur, the amount 
of such deduction is limited to the amount of the taxable income 
of the year, or even more narrowly, whereas losses of principal 
may greatly exceed taxable income. Manifestly the case is not so 
simple as the advocate of the income tax assumes, and when the 
element of risk is taken into account it seems that the income tax 
cannot be said to be unquestionably fairer than the property tax. 

The previous argument, moreover, takes for granted the ability 
theory of taxation ; and we must not forget that, no matter what 
place may be assigned to this theory, no system of taxation ever 
was or ever can be based wholly upon the principle of ability. We 



STATE AND LOCAL TAXATION 483 

do not exempt urban real estate because the owner has been un- 
fortunate in business and has no income this year. Business taxes 
do not exempt the merchant when his books show a balance on 
the wrong side. Taxation of real estate, and sometimes of busi- 
ness, is based very lai;gely upon the principle that taxpayers have 
received certain benefits and must pay for them whether they 
make large or small profits in any year. To the extent that bene- 
fit is and must be regarded in the distribution of taxes, it is ob- 
viously incorrect to say that the income tax is inherently fairer 
than a tax on property. All things considered, it seems impossible 
to prove that either tax is necessarily more equal than the other. 

A fifth comparison of the two taxes turns on the, matter of 
debt deduction. It is claimed that the state income tax is superior 
to the classified property tax because .the latter does not, like the 
former, make allowance for debts. Undoubtedly income taxes do, 
almost invariably, permit deduction of debts ; while property 
taxes, as we find them in the United States, usually permit only 
the offset of debts against credits, and sometimes narrowly re- 
strict that. But this is not universally or necessarily' true. In 
Switzerland the property tax is very generally imposed upon net 
fortunes.^ Under a general property tax deduction of all debts 
can be granted just as fully as under a general income tax, and 
under a special or classified property tax deduction of a propor- 
tionate amount of indebtedness can be permitted quite as readily 
as under a special income tax. With both taxes, abuse of the 
privilege is possible, and indeed inevitable under certain con- 
ditions ; while under other circumstances the privilege will not 
lead to serious abuse. Bad administration, excessive rates of 
taxation, unlimited rights of deduction against a limited class of 
property or income, make the operation of either tax farcical in 
the extreme ; but such conditions can be avoided under a classified 
property tax quite as readily as under a state tax upon incomes. 

A sixth consideration is that of enforcibility. We are some- 
times told that personal property is, from its very nature, impos- 
sible to assess with any certainty, and that therefore any attempt 
to tax it must fail ; whereas income can be taxed, especially if 
good administration is provided. Upon this point the opinions 
of writers seem to be determined largely by geography. In Eng- 
land, where there has long been a successful income tax and the 

1 See pp. 359-360. 



484 SELECTED READINGS IN PUBLIC FINANCE 

general property tax is unknown, Bastable and other writers 
naturally incline to the view that assessment of income is easier 
than assessment of property. In the Canton of Vaud, where there 
is a successful property tax, Cerenville holds that property is 
easier to tax than income. In Germany where both income and 
property taxes are now in successful operation, writers do not 
think they differ greatly in this respect. In the United States, 
where the general property tax has been a general failure, it is 
not strange that we should think almost any other tax easier to 
enforce. 

The fact seems to be that neither tax operates well unless ad- 
ministrative and other conditions are favorable, as I have already 
shown; and that between the two there is very little to choose. 
The income of many securities is a simpler and more definite 
thing to assess than is their capital value. The income of a busi- 
ness is usually about as difficult to ascertain as is the value of 
the property invested therein. When transfers are frequent, the 
value of real estate is probably easier to ascertain than is the 
net income. The value of farms or live stock is much easier to 
determine than the income of farmers ; indeed before the latter 
problem income taxes usually break down, and have to be ad- 
ministered by arbitrary rules of thumb. Altogether, it is difficult 
to say whether, upon the whole, either tax has any net advantage 
over the other. 

Which tax is more inquisitorial and inconvenient to taxpayers 
is a seventh matter that is sometimes the subject of argument, 
and here again we come to something that seems to depend upon 
what a person has been accustomed to. Many an advocate of a 
protective tariff under which a lady's trunk may be ransacked 
upon a dock, or a traveler invited to a private room where he 
is stripped and searched, has objected to an income tax upon 
the ground that it is inquisitorial. In American states where there 
is a formidable ''listing system," an income tax was, at least- 
very recently, usually regarded as an invasion of one's private 
affairs. And, upon the other hand, in New York, where tax- 
payers have never been required to return their property for 
taxation, we find advocates of an income tax who criticise the 
classified property tax on the ground that it requires a "listing 
system" and is inquisitorial. The fact is that boih taxes have to 
be inquisitorial, and that under good administration taxpayers 



STATE AND LOCAL TAXATION 485 

readily become reconciled to inquisition and presently accept it 
as the most natural thing in the world. You cannot excite, or 
even interest, an Englishman by telling him that the English 
income tax is inquisitorial ; and if you should make the same 
comment upon the property tax of Switzerland, the average 
Swiss would say, ''Why not ?" Between making returns of your 
income or returns of your property, there is little room for choice 
—at least upon rational grounds. 

An eighth line of comparison turns upon the antiquity or 
modernity of the two taxes. It is often said that the general 
property tax is a fiscal device of the palaeolithic age, when prop- 
erty was homogeneous and existed mostly in simple petrified 
forms which were visible and tangible and therefore could be 
taxed with reasonable success by prehistoric assessors equipped 
with prehensile toes. It is not surprising, then, that critics of 
the classified property tax have advanced the deadly palaeonto- 
logical objection that property taxation is antiquated and the 
whole modern tendency is to impose taxes upon income. 

Now it is true that the property tax existed in antiquity and 
that the income tax is mostly the product of the last century, 
but the assertion that property taxation is becoming obsolete is 
a complete perversion of historical fact. About the year 1800 it 
would have been comparatively easy for a palaeontologist to write 
the obituary of the general property tax. It had gone out of 
vogue almost everywhere, and could hardly be found except in 
two Swiss cantons and the original American states. From 1800 
to 1850 European opinion was mostly adverse, but nevertheless 
the general property tax was reintroduced into most of the Swiss 
cantons, and was adopted by newly organized American states. 
In Switzerland and the United States the general property tax is 
for the most part the product of the nineteenth century, and only 
in a few cantons or states is it a survival from earlier times. The 
last half of the nineteenth century brought a change of European 
opinion, and since 1893 a general property tax has been intro- 
duced, as a supplementary tax, in a number of European coun- 
tries. As a sole reliance, it is indeed obsolete ; but so are all 
other taxes. It exists in full vigor in Switzerland as a principal 
tax, and elsewhere in Europe as a supplementary tax. No Eu- 
ropean economist would to-day treat the property tax as obsolete ; 
and it is time for us to abandon palseontological fables. 



486 SELECTED READINGS IN PUBLIC FINANCE 

There is no modern tendency everywhere to abandon property 
as the basis of taxation. The taxation of income has been greatly 
extended since the opening of the nineteenth century, but that 
has not prevented the reintroduction of property taxes in Europe. 
Nor has it prevented the substitution of property for income as 
the basis of taxation in certain cases. It had long been customary 
in Europe to tax real estate upon an income basis ; but the rapid 
growth of cities in the nineteenth century made this method 
unduly favorable to undeveloped urban land, and therefore Ger- 
man cities have been adopting capital value as the basis of 
taxation, and England has adopted a tax upon increments of 
capital value. In Australasia, also, there has been a marked tend- 
ency to substitute capital for income value in the taxation of real 
estate. What has really happened is that modern countries are 
using both income and property as bases of taxation, according 
to the circumstances of the case; that they have found income 
taxes useful for some purposes and property taxes for others; 
and that the two imposts have been shown to be complementary 
and not mutually exclusive forms of taxation. Americans, there- 
fore, can experiment with the classified property tax without 
justly incurring the reproach that they are troglodytic petro- 
thetes. I venture the further suggestion that not a few states 
will find, as Wisconsin has done, that a judicious combination of 
income and property taxation is best suited to their needs. 

So far we have found that property and income taxes are very 
much alike in many important respects. But they have, of course, 
certain points of difi:'erence, two of which are important. A prop- 
erty taX' does not, like an income tax, reach directly incomes 
derived wholly from labor. To meet this situation most of the 
Swiss cantons supplement the property tax with a tax upon in- 
comes not derived from property, such as business profits in 
excess of the current rate of interest, wages, salaries, and profes- 
sional earnings ; and a very few American states, such as Massa- 
chusetts, have done the same thing. Such a combination of 
income and property taxes fills the gap which a single property 
tax would leave, and reaches all forms of incomes. If any critic 
objects that the classified property tax is defective, because it 
does not reach incomes that are not derived from property, the 
obvious answer is that there is a simple remedy which is already 
in common use. 



STATE AND LOCAL TAXATION 487 

The other important difference is that a pure income tax 
exempts from contribution property that yields no income, 
whereas a property tax reaches it if it has any value. The prop- 
erty in question may be divided into two classes : first, unpro- 
ductive investments, and, second, durable consumer's goods such 
as household belongings, personal effects, and objects of art. 
The second class need not detain us long. Swiss advocates of the 
property tax consider the income tax seriously defective in that 
it exempts the rich man from taxation upon luxurious consump- 
tion evidenced by the possession of costly furniture, valuable 
paintings, lavishly appointed stables, and the like. Upon the 
other hand, those American reformers who would cure most of 
the defects of the property tax by the short and simple remedy 
of exemption would naturally consider it a merit of the income 
tax that it avoids all trouble at this point. I will merely suggest 
that if any state or country considers this defect of the income 
tax to be a serious matter, it can nevertheless adopt that tax and 
then fill the gap by imposing direct consumption taxes upon 
objects of luxury. 

The exemption of unproductive investments, which takes place 
under the operation of a pure income tax, is a decidedly impor- 
tant matter. If the investments are securities, the speculator can 
be reached adequately by including his profits in your definition 
of taxable incomes. If they are capital invested in merchandise 
and machinery, exemption favors the concern that is struggling 
to exist ; but it may permit large properties that require expensive 
governmental services to go scot-free, or practically so, whenever 
they occupy land of little value. This problem is not a simple 
one, and I must content myself with the single suggestion that 
a combination of property and income taxes will give some relief 
to the concern that is having a bad year, but will require it, 
nevertheless, to pay something for the expensive service it 
receives. 

Unproductive land raises the most important question. Fifty 
years ago the tendency was almost universal to temper the wind 
to the shorn lamb, and the man who was "land poor" was con- 
sidered to be one of the "deserving poor." But the rapid growth 
of cities in Europe and the United States changed all this, and 
to-day the cry is to tax the • cursed "speculator." Europe, by 
taxing land upon an income basis, unduly favored the individual 



488 SELECTED READINGS IN PUBLIC FINANCE 

in question, and of late has shown some inclination to substitute 
property for income as the basis of real-estate taxation. In the 
United States, where taxation upon capital value was the long- 
established practice, we have avoided for the most part such con- 
ditions as have existed in European cities ; and no one would 
seriously propose to tax land, exclusively or even principally, 
upon an income basis. In the case of real estate, property is so 
far, superior to income as the basis of taxation as to leave little 
room for argument. This fact makes it certain that our states 
will not wholly abandon the taxation of property, and that the 
introduction of the income tax will not mean the abandonment 
of our present tax on real estate. 

The foregoing discussion leads to the conclusions, that neither 
the income tax nor the classified property tax is always and at 
every point to be preferred to the other ; that these taxes are, to 
a large extent, merely different methods of doing the same thing ; 
and that they ought to be regarded as imposts, not mutually 
exclusive, but capable of being combined in a logical and practi- 
cable scheme of taxation. In choosing between them at any point 
we need to weigh all the circumstances of the case and then deter- 
mine on which side the balance of advantage lies. No general 
pronunciamento in favor of either tax will solve any practical 
problem of taxation. 

In any state one's choice should be guided largely by public 
opinion. If the Rhode Island Commission of 191 1 had recom- 
mended a state income tax, instead of a flat tax on intangibles, 
its report would have fallen upon deaf ears. If recently a flat 
tax had been, proposed in Massachusetts, instead of a state income 
tax, nothing would have come of it. Since the only thing that 
matters is to get a proper classification of the objects of taxation, 
names are of no account and we ought to follow the line of least 
resistance. 

This conclusion, however, needs one qualification. The two 
taxes are not equally well adapted to the needs of every state. 
The income tax works much better in manufacturing and com- 
mercial communities than in rural, on account of the difficulty of 
computing farmers' incomes and because the high exemptions 
usually inseparable from an incometax permit the average farmer 
to slip through the net and diminish greatly the revenue secured. 



STATE AND LOCAL TAXATION 489 

It also involves a greater departure from established ideas and 
practices, and probably requires, at least when first introduced, 
more skillful administration. A state that is almost wholly de- 
voted to agriculture would, therefore, do well to adopt the 
classified property tax ; and one that is not prepared to centralize 
the machinery of assessment, as Wisconsin and Massachusetts 
have done, certainly will achieve no great success with the income 
tax. The last statement, however, is almost as true of the classi- 
fied property tax, as Iowa's experience shows ; so that we need 
always to insist that a considerable degree of centralization is a 
fundamental requisite in any plan of tax reform. 

The practical problem is everywhere one of adjustment. The 
present real-estate tax, flat taxes on tangible personalty at some 
practicable rate, the flat tax on intangibles, existing taxes on 
corporations, and the state income tax, — these are the elements 
out of which we must build our system of taxation. There 
are a number of practicable combinations. A classified property 
tax, plus a tax on incomes derived, from other sources than 
property, would be one solution. A tax on incomes not derived 
from property and upon incomes from intangible property, plus 
a classified property tax upon real estate and tangible personalty, 
is another possible adjustment. A tax upon all incomes not 
derived from real estate plus a property tax upon real estate is 
a third arrangement. A tax upon income of all descriptions, 
plus a property tax upon real estate, is a fourth possibility. And 
finally it is possible to impose a tax upon all incomes, and then 
tax all tangible property under a proper classification. The 
advantages and disadvantages of these five plans I cannot con- 
sider in this paper, but hope to discuss at some future time. 
Nearly all of them have precedents in the income taxes of the 
v/orld; the first three bring about nearly the same distribution 
of the weight of taxation ; but the fourth and fifth produce some- 
what different results. Where there exist special corporation 
taxes which it is desired to maintain, all of these plans v^ould 
need to undergo certain modifications, as was the case in both 
Wisconsin and Massachusetts; but all admit of the necessary 
adjustments. 

As a final, but not necessarily as the immediate, solution, I 
strongly prefer the fifth plan. If every citizen were taxable at 
his domicile upon his entire income without exemption or de- 



490 SELECTED READINGS IN PUBLIC FINANCE 

duction, except such as may be proper in the case of small in- 
comes, and if then all tangible property were taxed, under a 
proper classification, at its situs, we should have the simplest, 
most logical, and most satisfactory of all solutions. Everybody 
would pay an income tax in the locality where he lives and enjoys 
the benefits of government, and all property would contribute to 
the support of the jurisdiction where it receives the benefit of 
governmental services. The/ormer tax would necessarily be of a 
personal character ; the latter would be levied purely objectively 
upon things without regard to ownership. 

This arrangement would offer the following important advan- 
tages. It would greatly simplify administration, since there 
would be no need of apportioning incomes among different states, 
no questions would arise concerning the ownership of tangible 
property, and it would be unnecessary to ask what income or 
property is taxable and what is exempt. Secondly, it would se- 
cure a certain compensatory action of the two taxes, since 
inequalities in the actual /operation of one might be offset by 
inequalities in the other, and it would seldom happen that the 
two sets of inequalities would be cumulative. Thirdly, it would 
solve all questions of double taxation by universalizing the 
practice, and would secure a simple and just distribution of 
taxable values between the state where a taxpayer is domiciled 
and that in which his tangible property is located. For such 
double taxation of property and income there are not a few 
precedents, and it is the only practicable method by which under 
federal governments unjust double taxation can be wholly 
avoided. 

But I am not greatly interested to-day in ultimate solutions. 
For good or ill various states seem inclined to experiment with 
taxes on incomes, and it is important to understand the nature 
and the good or bad points of the income tax. It should not be 
regarded as a panacea, it is not going to replace all taxation of 
property, it must be carefully adjusted to existing taxes on 
tangible property and corporations, and it will certainly work 
badly if the rate is excessive or the administration decentralized. 
Finally, the state income tax should not be regarded as the rival, 
but rather as the complement or helpmate, of the classified 
property tax. 



STATE AND LOCAL TAXATION 491 

58. Preliminary Report of the Committee Appointed by the 
National Tax Association to Prepare a Plan of a Model System 
of State and Local Taxation. — The following report was sub- 
mitted to the Twelfth Annual Conference held under the auspices 
of the National Tax Association at Chicago, in June, 1919. 

L Introduction. 

II. The principles upon which a model system of state and 
local taxation should be based. 

III. The proposed personal income tax. 

IV. The proposed property tax. 
V. The proposed business tax. 

VI. Summary of the proposed system of taxation. 

VII. Tax administration. 

VIII. The inheritance tax. 

IX. Taxes upon consumption. 

X. The separation of state and local revenues. 

XI. Amendment of state constitutions. 

I. Introduction 

Section i. At the conference held at Atlanta in November, 
1917, under the auspices of the National Tax Association, the 
committee appointed by the Association to prepare a plan for a 
model system of state and local taxation submitted its first report. 
The committee was able to announce that it had reached a 
general agreement concerning the principles upon which a uni- 
form system of state and local taxation should be based, and 
expressed the opinion that, if further conferences of its members 
could be arranged, it would be possible to reach an agreement 
concerning the details of the proposed system. Following this 
report, the executive committee of the Tax Association au- 
thorized the holding of such a meeting, and accordingly the 
committee upon a model tax system met at Pass Christian, 
Mississippi, during the week extending from January 21 to 
January 27, 1918. 

There were present at the meeting Messrs. Bullock, Galloway, 
Howe, Link, Lord, Page, and Tarbet, and also, by special in- 
vitation of the committee, Mr. A. E. Holcomb, the Treasurer of 
the National Tax Association. Three members of the committee, 



492 SELECTED READINGS IN PUBLIC FINANCE 

Messrs. Adams, Mills, and Rearick, were unable to attend the 
meeting; Messrs. Adams and Rearick because they were pre- 
vented by the pressure of other duties, and Captain Mills because 
he had gone to France. Messrs. Adams and Rearick, however, 
were fully informed about the progress of the committee's de- 
liberations, and have lent their valuable criticism and counsel, so 
that the report now submitted has received the careful con- 
sideration of all the members of the committee except Captain 
Mills. 

Following the meeting at Pass Christian, the chairman of the 
committee prepared a tentative draft of a report based upon the 
votes taken by the committee, and this draft was submitted in 
July to all of the members of the committee except Captain 
Mills. After securing such criticisms and suggestions as the 
other members had to offer concerning the tentative draft, the 
chairman was able to prepare a report which is now submitted, 
vv^ith the approval of all the members of the committee except 
Captain Mills, for the consideration of the Twelfth Annual 
Conference of the National Tax Association. 

Section 2. This report has been printed in advance of the 
holding of the Conference, for the information of members of 
the Tax Association and delegates to the Conference. It is 
submitted as a preliminary rather than a final report, and is 
offered with a view to furnishing the Conference a basis for 
discussion. 

The committee realizes that a general agreement upon any plan 
for a model system of taxation can be reached, if at all, only after 
mature consideration by all interested in the work of the National 
Tax Association, and believes that no attempt should be made to 
reach a decision this year. We are, therefore, submitting this 
report for the considerate judgment of the Conference in the hope 
and expectation of deriving great assistance from such discussion 
and criticism as it will there receive. If the conclusions we have 
reached command sufficient approval, it will then be possible for 
this committee, or some other appointed for the purpose, to pre- 
pare in the following year what may be considered a final report. 
This is a matter in which haste is both unnecessary and undesir- 
able, and one in which success can result only from a general 
consensus of opinion reached after the fullest and maturest 
deliberation. 



STATE AND LOCAL TAXATION 493 

Section 3. In further explanation, we desire to point out that 
the present report deals only with the general principles upon 
which a model system of taxation may be constructed and with 
the general framework of such a system. Even if all necessary 
details had been fully worked out, it would have been undesirable 
to present them now, since they would inevitably have tended, 
to some extent, to divert attention from the fundamentals of 
the plan. But all the details have not been worked out, and could 
not be within the time the committee has had at its disposal. We 
have found that, even if the plan in its general outlines is ap- 
proved, there will remain numerous matters that will require 
further consideration, some of them by committees having tech- 
nical qualifications which the members of the present committee 
do not possess. We have, therefore, not attempted to deal with 
such subjects, and have recommended to the executive committee 
of the National Tax Association the appointment of several 
special committees to report upon these questions. A model sys- 
tem of state and local taxation cannot be devised in a single 
year, and we are, therefore, attempting in the present report to 
provide only a foundation upon which future work can be based. 
We believe, however, that, if such a foundation can be laid, the 
work that remains will be greatly facilitated and the completion 
of the structure need not be long deferred. 



II. The Principles upon which a Model System of State 
AND Local Taxation should be Based 

Section 4. Whatever other purposes taxation tnay properly 
have, its fundamental purpose is to provide revenue which, it 
will be agreed, ought to be raised as equally, certainly, con- 
veniently, and economically as possible. Until this fundamental 
purpose is achieved, and the American states are to-day very far 
from accomplishing it, we shall hardly find it worth while to con- 
sider what other purposes taxation may properly have. There- 
fore, the committee has confined itself to the one problem of 
immediate practical importance, which is that of devising methods 
by which the large revenues now required by American state 
and local governments may be raised with the greatest practicable 
degree of equality, certainty, convenience, and economy. 



494 SELECTED READINGS IN PUBLIC FINANCE 

Section 5. Any proposed system of state and local taxation 
must, at the very outset, recognize certain existing conditions 
and conform to certain practical requirements before it can be 
seriously considered as a basis for legislation. These conditions 
and requirements the committee has had constantly in mind. 
They may be stated briefly as follows : 

A. The proposed system must yield the large revenues which 
our state and local governments require at the present time. 

B. It must be practicable from an administrative standpoint ; 
that is, it must be capable of being administered by such means 
and agencies as the states have at their command and can 
reasonably be expected to provide. 

C. It must be adapted to a country with a federal form of 
government, and to this end must reconcile the diverse claims of 
our several states, which now conflict at many points, thereby 
producing unjust multiple taxation and disregard of interstate 
comity. 

D. It must respect existing constitutional limitations, federal 
and state, or else point to practicable methods of constitutional 
amendment. 

E. It must represent as nearly as possible a general consensus 
of opinion, and to this end must give careful consideration to the 
most influential body of opinion developed and formulated by the 
National Tax Association. 

F. It must not propose measures wholly foreign to American 
experience and contrary to the ideas of the American people. 

Section 6. Study of the tax laws of the American states re- 
veals the fact that there are three fundamental principles which 
have been mose or less clearly recognized by our lawmakers, and 
have very largely determined the provisions of the enactments 
now standing on the statute books. 

The first is the principle that every person having taxable 
ability should pay some sort of a direct personal tax to the 
government under which he is domiciled and from which he 
receives the personal benefits that government confers. This is 
most clearly exemplified by the laws providing for the taxation 
of securities and credits which represent in large part inter- 
ests in tangible property and business located in other juris- 
dictions. In spite of the fact that such laws may had to unjust 
double taxation, most of the states have insisted upon taxing 



STATE AND LOCAL TAXATION 495 

evidences of ownership, upon the theory that the owners are 
within their jurisdiction and receive from them certain personal 
benefits which justify the imposition of a tax. State income-tax 
laws usually proceed upon a similar principle ; and the same 
may be said of the poll tax, which is still found in many of the 
commonwealths. 

The second principle is that tangible property, by whomso- 
ever owned, should be taxed by the jurisdiction in which it is 
located, because it there receives protection and other govern- 
mental benefits and services. That the owner is frequently a 
non-resident is not considered a material fact, because the prop- 
erty must be protected where it is located, and, if employed in 
trade, comes in competition with similar property of residents. 
This principle, furthermore, has received the sanction of the 
Supreme Court of the United States in cases which have de- 
veloped the rule that tangible property is taxable in the juris- 
diction within which it is located, and not elsewhere.^ 

The third principle, somewhat less clearly and generally ex- 
emplified by our tax laws but discernible none the less, is that 
business carried on for profit in any locality should be taxed for 
the benefits it receives. If the owners of the business are residents 
of the state, this principle need not be appealed to, since the 
ordinary methods of taxation may be considered to provide for 
such a case. If a considerable amount of real estate and other 
tangible property is employed in a business conducted for the 
account of non-residents, again no appeal may be made to this 
principle, since here too the ordinary methods of taxation may 
be considered adequate. But if the owners are non-residents, and 
the business, though very profitable, employs little or no prop- 
erty subject to taxation in the locality, the states, to an increasing 
degree, demand that some method shall be devised for reaching 
such business enterprises. This tendency is exemplified in the 
taxation of corporate franchises in California and some other 
states, in the taxes imposed on incomes in Wisconsin and some 
other commonwealths, and in such laws as that enacted by 
Louisiana taxing non-residents upon credits arising from business 
done within that state. It finds, further, an even more general 
expression in the numerous business taxes, usually in the form of 
licenses, which are found in many states, particularly in the South. 

1 See, for instance, Union Refrigerator Transit Co. v. Kentucky^ 199 U.S. 194. 



496 SELECTED READINGS IN PUBLIC FINANCE 

Whatever one may think of any or all of these principles, the 
fact remains that they undoubtedly represent hard facts which 
any new system of taxation must take into account. That they 
are not in many cases logically and consistently applied, admits 
of no doubt ; that they sometimes lead to confusion and involve 
unjust double taxation and disregard of interstate comity, cannot 
be questioned. But the committee believes that there is merit in 
each of these principles, even though they have been frequently 
misapplied ; and is satisfied that the laws in which the principles 
are embodied will not be changed except to give place to statutes 
that provide fairer and more logical methods of carrying the 
principles into effect. 

The problems we here encounter have not arisen by chance, or 
as a result of mere ignorance and inexperience. They result from 
claims which the states assert in pursuance of what they consider 
their legitimate interests in the vitally important matter of taxa- 
tion. At this point, indeed, we get to the very heart of the most 
difficult problem encountered in devising a logical plan of taxa- 
tion in a country having a federal form of government ; that is, 
the adjustment of the conflicting claims of independent taxing 
authorities. The committee, therefore, has determined to make 
this problem its chief point of attack upon the entire subject 
referred to its consideration. 

Section 7. Mature reflection has brought the committee to 
the conclusion that the conflicts of jurisdiction and other evils 
resulting from tax laws based upon the foregoing principles 
have not been due to inherent defects of the principles themselves, 
but have arisen from the illogical and inconsistent methods 
by which the principles have frequently been applied. That 
every person should pay a direct tax to the government under 
which he lives, appears to us perfectly reasonable and just ; that 
tangible property should be taxed where located, is both reason- 
able and in every way expedient ; and that business may properly 
be taxed in any jurisdiction where it is carried on, seems to 
admit of no serious doubt. Moreover, we find in the tax laws 
of other countries many examples of explicit recognition of 
all of these principles; so that we must conclude that both 
reason and experience confirm the underlying theories upon 
which the American states have based these provisions of their 
tax laws. 



STATE AND LOCAL TAXATION 497 

The trouble has been that the states have not applied logically 
and consistently the principles upon which they have undertaken 
to act. Under the system of the general property tax it was 
practically impossible for them to do so. They naturally and 
properly taxed tangible property within their jurisdictions on the 
theory that such property ought to be taxed at its situs, and then 
they sought to tax intangible property representing interests in 
tangible property already taxed elsewhere, on the theory that 
such intangible property ought to be taxed at the domicile of the 
owner. By so doing, they imposed but one tax on property 
owned by persons residing in the state where the property was 
situated, and imposed two taxes upon a great deal of property the 
interests in which were represented by securities owned by per- 
sons whose domiciles were not in the state where the tangible 
property had its situs.^ In each case the underlying theory was 
sound, but the method of application resulted in unjust double 
taxation of interstate investments. The only solution under the 
general property tax would be an agreement between states by 
which one tax would be levied, presumably at the situs of the 
property, and the proceeds thereof would be divided in equitable 
proportions between the state where the property had its situs 
and that in which the owner was domiciled. But such an agree- 
ment, besides presenting administrative difficulties, would have 
been practically impossible to secure ; and therefore unjust double 
taxation has been tolerated because the only practicable alter- 
native seemed to be the surrender of a claim which was in itself 
just. 

In the attempts of the states to make property or income taxes 
apply to all kinds of business carried on within their jurisdiction, 
similar conditions obtain. Assuming that all such business ought 
to be taxed, it is nevertheless true that it ought not to be taxed 
by a method which imposes two taxes upon some enterprises and 
only one tax upon others. The states of domicile naturally de- 
cline to forego all their claims with respect to the property or 
income concerned, because they hold that the owners or recipients 

1 Double taxation sometimes occurs, of course, when the persons having an 
interest in the property live in the state where it is situated, as in the case of 
mortgages and corporation bonds. No attempt is made at this point to consider 
all possible cases of unjust double taxation, although the plan we propose 
provides a remedy for them. 



498 SELECTED READINGS IN PUBLIC FINANCE 

have an obligation to the governments under which they Hve; 
the states where the business is carried on with equal propriety 
assert their right to tax, and the result is unjust double taxation. 
The underlying theories of taxation are correct in both cases, but 
the method of application is seriously defective. 

Section 8. It is the opinion of the committee that the only 
method of reconciling these conflicting claims of the states is the 
adoption of a diversified system of taxation which recognizes fully 
the three principles above mentioned and provides a method by 
which, without formal agreement among the states, these prin- 
ciples may be logically and consistently applied. We propose, 
therefore, a personal tax which shall be levied consistently upon 
the principle of taxing every one at his place of domicile for the 
support of the government under which he lives ; a property tax 
upon tangible property, levied objectively where such property has 
its situs and without regard to ownership or personal conditions ; 
and finally, for such states as desire to tax business, a business 
tax which shall be levied upon all business carried on within the 
jurisdiction of the authority levying such tax. By this method 
we believe it is possible to satisfy every legitimate claim of every 
state without imposing unequal and unjust double taxation upon 
any class of income, property, or business. We propose, in other 
words, nothing more than to ask the states to apply logically 
and consistently the principles that to-day underlie the greater 
part of their tax laws. By so doing we are recommending 
action along the line of least resistance, and for our proposals 
we find many precedents in the legislation of this and of 
other countries. 

Section 9. Such a diversified system of taxation as we recom- 
mend will not only reconcile the conflicting claims of the states ; 
it will also facilitate greatly a proper classification of the objects 
upon which taxation falls. One of the greatest evils of the gen- 
eral property tax has been that it has been levied upon different 
classes of property without regard to differences in the nature 
and taxable ability of such classes, or to the different degrees in 
which they benefit from public expenditure. This is a common- 
place to all students of the subject, and is sufficiently set forth in 
the publications of the National Tax Association. The Associa- 
tion has long been committed to the proper classification of the 
subjects of taxation, and the conferences held under its auspices 



STATE AND LOCAL TAXATION 499 

have repeatedly endorsed the principle of classification. So far, 
indeed, as the principle is concerned, we believe that a general 
agreement upon this point may be taken for granted, and that 
the only profitable topic for discussion is, and for some time has 
been, that of the proper method of classification. We find it 
unnecessary, therefore, to dwell further upon the need of classi- 
fying the subjects of taxation. 

It is important, however, to point out that the plan we recom- 
mend goes far toward securing a proper classification of the 
subjects of taxation. The personal income tax will reach every 
kind of taxable income, and will make it unnecessary to attempt 
to levy any tax upon intangible property, thus eliminating the 
most serious difficulty connected with property taxation. The 
property tax will be applicable to every form of tangible prop- 
erty that any state wishes to tax; and admits of being levied 
upon such property uniformly, or of being levied under a proper 
classification such as we shall hereafter suggest. And finally, the 
business tax, since it will be levied purely as a business tax and 
not as a part of a personal income tax or a property tax, can be 
readily adjusted in such a manner as the needs of business and 
the situation of every state may require. 

Section 10. The plan which the committee recommends is, 
therefore, fundamentally a plan intended to reconcile the con- 
flicting interests of the states, and to facilitate the proper classi- 
fication of the subjects of taxation. It involves nothing new in 
principle, and merely requires the logical application of principles 
already recognized by the tax laws of many states. It will bring 
about a full and adequate taxation of income, property, and 
business, and will produce as much revenue as the state and local 
governments can expect to derive from these sources. Finally, 
it encounters no insuperable constitutional difficulties, and cer- 
tainly will require no more changes in state constitutions than 
any other plan that would be adequate to the needs of the case. 

III. The Proposed Personal Income Tax 

Section ii. The first decision reached by the committee was 
that in the proposed model system of state and local taxation 
there should be a personal tax levied with the exclusive view 
of carrying out the principle that every person having taxable 



500 SELECTED READINGS IN PUBLIC FINANCE 

ability should pay a direct tax to the government under which he 
is domiciled. There appeared to be four forms of personal 
taxation which have been employed for this purpose. 

The first of these is the poll tax. It is evident, however, from 
the nature of the case that this tax would be utterly inadequate 
to accomplish the object in view, even if levied at graduated 
rates, as has sometimes been done in other countries. It would 
be so unequal and so far inferior to the other forms of personal 
taxation that it cannot be deemed worthy of serious consider- 
ation. Whether, as a supplement to an adequate system of per- 
sonal taxation, it might be desirable to retain the poll tax as a 
means of insuring some contribution from people owning no 
property and having small incomes, the committee preferred not 
to consider in this report. It has been our desire to confine our- 
selves to main issues, and not to undertake to solve every minor 
problem of taxation. We, therefore, say nothing about the poll 
tax, except that it is inadequate for the purpose that we have 
in view, and cannot be recommended as an important element 
in any system of state and local taxation. 

The second method of imposing the personal tax would, be to 
levy a tax upon every man's net fortune ; that is, upon the total 
of his assets in excess of his liabilities, without exemption of any 
kind of asset or exclusion of any liability. This would mean a 
general property tax, but a net property tax such as is found in 
some countries in Europe. It would be a tax levied not upon 
property as such, but upon net fortune as a measure of the citi- 
zen's personal liability to contribute to the government under 
which he is domiciled. It would be entirely distinct from any tax 
that might be levied objectively upon property, as property, at 
the place of its situs, and would have to be levied exclusively 
upon the property owner at his place of domicile. It would 
necessarily be levied at a moderate rate, perhaps $3 per $1000, 
which would correspond approximately to a 6 per-cent income 
tax upon investments yielding 5 per cent. Although precedents 
may be found in other countries for such a personal tax levied 
upon net fortunes, the committee has concluded that it is not to 
be recommended for adoption in the United States. Such a tax 
would raise the difficult constitutional question of the right of a 
state to levy a tax even upon the net fortune of a citizen if that 
fortune included tangible property located in another common- 



STATE AND LOCAL TAXATION 501 

wealth. It is, furthermore, foreign to American experience, and 
would certainly not lead us along the line of least resistance. 
Since the coming of the federal income tax, it is obvious that it 
is easier for the states, and more convenient for the taxpayers, 
to adopt income rather than net fortune as the measure of the 
obligation of the citizen to contribute to the government under 
which he lives. 

The third method of personal taxation is what may be called 
a presumptive income tax; that is, a tax levied upon persons 
according to certain external indicia which are taken to be satis- 
factory measures of taxable ability. House rent is the index 
commonly used in such presumptive income taxes, and a tax on 
rentals has been proposed in times past by special commissions 
in Massachusetts and New York. Such a tax would be com- 
paratively easy to administer, and would raise no difficult con- 
stitutional questions. It would undoubtedly be better than an 
income tax or a tax on net fortunes if those taxes were badly 
administered. But the amount that a citizen pays for house rent 
is after all such a very imperfect and inadequate indication of 
his income or fortune that the committee is unwilling to recom- 
mend it to any state in which there is any reasonable expectation 
that conditions are, or may presently become, favorable for the 
introduction of a better form of personal tax. It appears that 
in France, where the tax on rentals has been in continuous opera- 
tion since the Revolution, there is so little correspondence be- 
tween house rents and taxable ability that in the greater part 
of the communes the taxing officials disregard to a greater or 
less extent the letter of the law, and assess people according to 
what they appear able to pay. The committee finds, therefore, 
that the tax on rentals is not to be recommended except, perhaps, 
as a last resort in states where administrative and other con- 
ditions are unfavorable to the introduction of any better form 
of personal taxation. 

There remains a fourth form of personal taxation, the personal 
income tax. By this is meant a tax levied upon persons with 
respect to their incomes, which are taxed not, objectively as 
incomes but as elements determining the taxable ability of the 
persons who receive them. This tax is better fitted than any 
other to carry out the principle that every person having taxable 
ability shall make a reasonable contribution to the support of the 



502 SELECTED READINGS IN PUBLIC FINANCE 

government under which he lives. It is as fair in principle as 
any tax can be ; under proper conditions, it can be well adminis- 
tered by an American state, as Wisconsin and Massachusetts 
have proved ; it is a form of taxation which meets with popular 
favor at the present time, and therefore seems to offer the line of 
least resistance. The committee, therefore, is of the opinion that 
a personal income tax is the best method of enforcing the per- 
sonal obligation of the citizen for the support of the government 
under which he lives, and recommends it as a constituent part of 
a model system of state and local taxation. 

Section 12. While it is impossible in this report to describe 
the proposed taxes in every detail, it is essential that the com- 
mittee should explain at least in broad outlines the manner in 
which these taxes should be levied. In so doing it will be neces- 
sary to refer constantly to the general principles previously 
stated, and to adjust the details of each tax in such a manner as to 
enable it to carry into effect logically and consistently the prin- 
ciple upon which it is based. 

Since the purpose of the personal income tax is to enforce the 
obligation of every citizen to the government under which he is 
domiciled, it is obvious that this tax must be levied only upon 
persons and in the states where they are domiciled. It is contrary 
to the theory of the tax that it should apply to the income from 
any business as such, or apply to the income of any property 
as such. The tax should be levied upon persons in respect of 
their entire net incomes, and should be collected only from 
persons and at places where they are domiciled. It should not 
be collected from business concerns, either incorporated or un- 
incorporated, since such action would defeat the very purpose 
of the tax. 

At first thought this proposal will doubtless seem objectionable 
to many, who will ask why a state should not tax all incomes 
derived from business or property located within its jurisdiction, 
irrespective of whether the recipients are residents or non- 
residents. And if the personal income tax were the only one 
proposed, the objection would be well grounded. The committee, 
however, is under the necessity of reconciling the conflicting 
claims of the states, and of doing so in a manner that will avoid 
unjust double and triple taxation of interstate brsiness and in- 
vestments. We, therefore, propose as the only practicable remedy 



STATE AND LOCAL TAXATION 503 

a system which comprises three taxes, each of which is designed 
to satisfy fully and fairly the legitimate claims of our several 
states. We are elsewhere providing methods by which property 
will be taxed where located and business will be taxed where it 
is carried on. At this point we are dealing exclusively with a 
personal tax designed to enforce the right of our states to tax all 
persons domiciled within their jurisdictions ; and we are merely 
insisting that, in enforcing this claim, the states shall act con- 
sistently, and shall confine personal taxation to persons and 
attempt to levy it only at the place of domicile. If the personal 
income tax is levied in any other way, it will simply reproduce 
and perpetuate the old evil of unjust double taxation of interstate 
property and interstate business. 

The second detailed recommendation we have to make is that 
the personal income tax shall be levied in respect of the citizen's 
entire income from all sources. Under existing constitutional 
limitations, of course, interest upon the bonds of the United 
States and the salaries of federal officials cannot be taxed by the 
states, but we recommend that all other sources of income be sub- 
ject to the income tax without exception or qualification. We are 
aware that, under the unreasonable and unworkable requirements 
of the general property tax, it has appeared desirable in times 
past to exempt state and local bonds from taxation, to exempt 
real-estate mortgages, and to grant various other exemptions. 
All such exemptions are inconsistent with the theory of the tax 
we here propose, and should be discontinued as rapidly as the 
circumstances of each case permit. Against the policy which led 
to these exemptions under the general property tax we here offer 
no criticism. But we are now dealing with a tax which is de- 
signed to be a part of a new system of taxation, and it is evident 
that none of the considerations which led to the exemptions 
created under the general property tax are applicable to a per- 
sonal income tax levied upon the principle we here advocate. 
The personal obligation of the citizen to contribute to the support 
of the government under which he lives should not be affected 
by the form his investments take, and to exempt any form of 
investment can only bring about an unequal, and therefore an 
unjust, distribution of this tax. Our reasoning applies, of course, 
to the exemption which agencies of the federal government now 
enjoy. But that is a matter which is beyond the control of the 



504 SELECTED READINGS IN PUBLIC FINANCE 

states, and for the purposes of this report it will be considered 
a fixed datum which must be accepted.^ 

Our third specific recommendation is that the personal income 
tax should be levied upon net income defined substantially as a 
good accountant would determine it. We submit no formal defi- 
nition at this time, and content ourselves with referring to the 
provisions of the Wisconsin and the Massachusetts income taxes. 
Our recommendation means that operating expenses and interest 
on indebtedness must be deducted, but we wish to call attention 
to the fact that the issue by the federal government of large 
amounts of bonds which are exempt from local taxation will 
make it necessary for the states to limit the interest deduction to 
an amount proportional to the income which the taxpayer derives 
from taxable sources. This would mean that if a person derives 
half of his income from taxable sources and one-half from tax- 
exempt federal bonds, he should be permitted to deduct but one- 
half of the interest that he pays upon his indebtedness. A.ny 
other procedure will tend to make the personal income tax a 
farce in many cases and will give occasion for legitimate 
complaint. 

The fourth recommendation relates to the exemption of small 
incomes. The committee believes that the amount of income 
exempted from the personal income tax should not exceed $600 
for a single person and $1200 for a husband and vnie, with a 
further exemption of $200 for each dependent up to a number not 
to exceed three. This would give us a maximum exemption of 
$1800 for a family consisting of husband, wife, and three children 
or other dependents. We recognize, however, that conditions 
may well differ in various states, and have decided to make no 
specific recommendations about the amount of the exemptions 
granted to persons having small incomes. We limit ourselves to 
the above statement of the maximum exemptions that should be 
granted and the further observation that, under a democratic 
form of government, it is desirable to exempt as few people as 

1 We here follow the view that has long prevailed concerning existing restric- 
tions on the taxing power of the states. In two recent cases {J^eck v. Lowe and 
U. S. Glue Co. V. Oak Creek, 247 U. S.) the court has developed a doctrine which 
may justify the belief that a net income tax, levied upon state officials along with 
all other persons, with respect to their entire net incomes, might not be held to 
be a tax upon agencies of the federal government, and theiefore forbidden by 
federal decisions. 



STATE AND LOCAL TAXATION 505 

possible from the necessity of making a direct personal contri- 
bution toward the support of the state.^ 

Our fifth recommendation is that the rate of the income tax 
shall be the same for all kinds of income; that is, that it shall 
not be differentiated according to the sources from which income 
is derived. If the tax stood by itself, a strong argument could be 
made for imposing a higher rate upon funded than upon un- 
funded incomes. But the tax is, in fact, designed to be part of 
a system of taxation in which there* will be a tax upon tangible 
property. Under this system there will be heavier taxation of the 
sources from which funded incomes are derived; and there will, 
therefore, be little if any ground for attempting to differentiate 
the rates of the personal income tax. Such differentiation, further- 
more, would greatly complicate the administration of the tax, and 
would lead to numerous difficulties. Upon all accounts, therefore, 
we recommend that there shall be no differentiation of the rate. 

In the sixth place, we recommend that the rates of taxation 
shall be progressive, the progression depending upon the amount 
of the taxpayer's net income. Concerning the precise schedule 
of rates, we offer certain general recommendations. The lowest 
rate should not; be less than i per cent, and under present con- 
ditions we regard it as inexpedient for any state to impose a rate 
higher than 6 per cent. The classes of taxable income to which 
the various rates apply need not be smaller than liooo, and prob- 
ably should not be larger. It results from what has been said 
that if the exemption to a single person be placed at |6oo, we 
would recommend a tax of i per cent upon any amount of income 
between $600 and $1600 ; a tax of 2 per cent upon any amount of 
income between $1600 and $2600; a tax of 3 per cent upon any 
amount of income between $2600 and $3600 ; a tax of 4 per cent 
upon any amount of income between $3600 and $4600 ; a tax of 
5 per cent upon any amount of income between $4600 and $5600 ; 
and a tax of 6 per cent upon all income in excess of $5600. We 
present these figures merely for the purpose of illustrating our 
preferences, and make no definite recommendation except that the 
rates of the personal income tax should be moderate, and should 
be, as nearly as practicable, uniform throughout the United States. 

^ For administrative convenience we recommend that, in order to minimize 
the number of very small tax bills, no person liable to pay an income tax shall 
be assessed for less than $1. 



506 SELECTED READINGS IN PUBLIC FINANCE 

Our seventh suggestion concerns the administration of the 
proposed tax. No argument can be needed by the National Tax 
Association to support our recommendation that the administra- 
tion of the personal income tax should be placed in the hands of 
state ofiicials. This we regard as an indispensable condition for 
the successful operation of any state income tax, and we should 
be disinclined to recommend the adoption of an income tax by 
any commonwealth that is unwilling to turn over its administra- 
tion to a well-organized and properly equipped state department. 
Local administration of an income tax has never worked well 
and, in our opinion, never can operate satisfactorily. It is obvious, 
finally, that a state tax commission, or commissioner, is the proper 
agent to administer the proposed tax; and we desire to record 
our belief that satisfactory results are hardly to be expected if 
the administration is turned over to any other state officials. 
Upon this whole question of administration, which is of the most 
vital importance, we are fortunate in being able to rely upon the 
authority of the opinions repeatedly expressed by the conferences 
of the National Tax Association. We are glad also to point to 
the experience of Wisconsin and Massachusetts. 

Our eighth recommendation is that the personal income tax be 
collected from taxpayers, upon the basis of strictly enforced and 
controlled returns, and without any attempt to collect it at the 
source. Upon this point there might have been doubt several 
years ago. But the experience of Wisconsin and Massachusetts 
shows conclusively that, with good administration, a reasonable 
tax upon incomes can be collected in the manner we have recom- 
mended, with the general cooperation of the taxpayers and with 
the minimum amount of evasion. Collection at source presents 
serious administrative difficulties, imposes unwarranted burdens 
upon third parties in respect of transactions which strictly con- 
cern only the taxpayers and the government, and not infrequently 
tends to shift the burden of the tax to the wrong shoulders. 
What we seek is a personal tax which shall not be shifted and 
shall bring home to the taxpayer, in the most direct possible 
form, his personal obligation for the support of the government 
under which he lives. Collection at the source is plainly incon- 
sistent with the purpose of such a tax. We recommend, however, 
that in certain cases information at the source be required as is 
now done under the Massachusetts and Wisconsin income taxes. 



STATE AND LOCAL TAXATION 507 

Such information is helpful to the administrative officials, and 
does not alter the incidence or otherwise affect injuriously the 
operation of a personal income tax. 

Section 13. The only remaining point is that of the proper 
disposition of the proceeds of this tax. So far as our general 
plan of taxation is concerned, it is immaterial whether the revenue 
from the personal income tax is retained in the state treasury, 
distributed to the local political units, or divided between the 
state and local governments. It is probable, furthermore, that 
the same solution may not be advisable in every state. If the 
state should keep the entire revenue, then every section of the 
state would benefit to the extent that such revenue might reduce 
the direct state tax. Upon the other hand, if the revenue from the 
income tax is distributed w^holly to the local units, as is now the 
case in Massachusetts, the lightening of local burdens tends to 
reduce the pressure of the direct state tax. It seems probable that 
in most cases a division of the revenue would be considered 
preferable; and in such cases we suggest that the state govern- 
ments might well retain a proportion corresponding to the pro- 
portion which state expenditures bear to the total of the state 
and local expenditures, and that the same principles should apply 
in determining the share received by each of the subordinate 
political units. Thus in case state expenditures amount to one- 
fifth of the total, county expenditures to two-fifths, and munici- 
pal expenditures to two-fifths, the state should receive one-fifth 
of the revenue from the income tax, the counties two-fifths, and 
the municipalities two-fifths. Whether distribution to the local 
units should be made upon the basis of the amount of tax col- 
lected in each unit, or whether the tax should be distributed 
f upon some other basis, is also immaterial to our general plan of 
taxation. In states where domiciliary changes occurring under 
the general property tax have not produced an unnatural con- 
centration of wealth in certain localities, it will probably be best 
to distribute the revenue according to the domicile of the tax- 
payers. But where, as in Massachusetts, under the operation 
of the general property tax, wealth has been greatly concentrated 
in a few localities, such a method of distribution is obviously 
impossible and some other method must be found. In such a 
case the income-tax revenue might be utilized for a state school 
fund, or might be distributed among the localities according to 



508 SELECTED READINGS IN PUBLIC FINANCE 

the proportions in which they are required to contribute to the 
direct state tax. Since this entire question of distribution must 
be so largely affected by local conditions, the committee prefers 
to do no more than to offer these general suggestions. 

IV. The Proposed Property Tax 

Section 14. The second part of the tax system proposed by 
the committee is a tax upon tangible property, levied exclusively 
at the place where such property is located. By this means the 
several states will be able to satisfy adequately and fairly their 
just claims in respect of property enjoying protection and other 
benefits under their laws. 

Concerning this tax, it will be observed, we recommend that 
it be confined to tangible property, and that intangible property 
of all descriptions be exempt from taxation as property. All 
attempts to reach. such property under the general property tax 
have in the past proved failures, and in our opinion, with the 
rates of taxation now prevailing in the several states, will always 
fail to accomplish the desired end. Moreover, they necessarily 
involve a large amount of unjust multiple taxation which we 
can see no way of avoiding under the property tax.^ We believe 
that the personal income tax which we have already recom- 
mended will reach income from intangible property fully and 
fairly at the only place where it can be taxed without running 
the risk of unjust double taxation ; that is, at the domicile of the 
recipient. With this provision made for deriving a fair revenue 
from intangible property, it is obviously undesirable that the 
states should continue to tax it as property, and we therefore 
recommend that, under the proposed system, property taxation 
be confined exclusively to tangible property. 

Section 15. Whether tangible property should be taxed at a 
uniform rate or should be classified for taxation is a question 
that requires careful consideration and one concerning which 
there may be difference of opinion. It is the judgment of the 

1 As an illustration of this we may refer to the vast amount of litigation, un- 
certainty, and injustice resulting from the attempt to fix the situs of intangible 
property and from the recognition of a so-called "business situs" for intangible 
property, which inevitably bring about unjust double taxation. This subject will 
be further alluded to in our digcussion of the business tax which we think would 
remove the cause of this difficulty. 



STATE AND LOCAL TAXATION 509 

committee, however, that a distinction should be drawn at least 
between real estate and tangible personal property, and that the 
latter should receive a separate classification. The reasons for 
this conclusion are, in the first place, the difficulty of enforcing 
strictly a tax upon many kinds of tangible personal property 
at the high rates of taxation which under present conditions 
pur states commonly impose and must continue to levy upon real 
estate. Tangible personalty can be moved from one jurisdiction 
to another, and it frequently is removed if taxation is considered 
excessive. Moreover, it does not occasion so much government 
expenditure as real estate, and does not benefit from many kinds 
of local expenditure to the same degree as the latter. Our opinion 
is confirmed by the fact that in a state like Wisconsin an efficient 
state tax commission, clothed with all necessary authority, has 
become so impressed with the difficulty of taxing tangible per- 
sonalty at the same rate as real estate that it has recommended 
the total exemption of this class of property. Where the general 
rate of taxation is low, the difficulties attending- the taxation of 
tangible personal property may be less serious ; but, at the 
commonly prevailing rates of $1.50 or $2 per $100, we believe 
that strict enforcement of a tax upon tangible personalty will 
continue to be found most difficult and even impossible. 

In our opinion, the rate of taxation upon tangible personal 
property should not exceed $1 per $100. At that rate it is prob- 
able that, with suitable provision for enforcement, the tax will 
yield not less than is now collected at the higher rates usually 
applied to property in general, and may even yield something 
more. Experience may show that even a lower rate, perhaps 
$0.80 per $100, may be preferable; only experience can deter- 
mine this point. For the present, we content ourselves with 
recommending a separate classification for tangible personalty 
with a maximum rate of $1 per $100.^ 

It is sometimes suggested that the remedy for excessive rates 
of taxation upon tangible personalty is not a separate classifica- 
tion for such property but effective provision for a full valuation 
of all property. With such full valuation, it is thought, the rate 
of taxation upon all property, real and personal, will be reduced 

1 In the opinion of the committee, it is desirable to exempt from taxation a 
certain minimum amount of tangible personal property, perhaps some such 
figures as ^200 for an individual and $400 for a family. 



5IO SELECTED READINGS IN PUBLIC FINANCE 

to some such figure as is here recommended for tangible per- 
sonalty. In a few states, like West Virginia and Kansas, this 
result was actually secured some years ago by thoroughgoing 
revaluations ; but, with the present high level of public expendi- 
ture, it cannot be attained in the average American state, and 
to-day is hardly to be expected anywhere. We therefore see no 
practicable course except to recommend a separate classification 
for tangible personalty, and this we do in order to make our tax 
laws enforcible and to create conditions under which all taxable 
property shall be valued strictly in accordance with law. 

Section i6. At this point it should be remarked that the im- 
position of a classified tax on tangible personal property is not a 
vital feature of the general plan which we recommend. Under our 
proposed system any state desiring to do so could continue to tax 
tangible personalty at the same rate as real estate without violat- 
ing any rule of interstate comity or defeating the general purpose of 
our plan. We are here dealing with a subject of taxation which 
lies wholly within the jurisdiction of the state levying the tax, 
and no unjust or inconsistent results will develop if certain states 
continue to tax tangible personalty in the same manner as real 
estate. It should also be pointed out that our general plan would 
not be affected at any vital point if some state, like Wisconsin 
and New York, should prefer to exempt tangible personalty from 
all taxation. Here, again, it would be wholly a question of what a 
state might prefer to do with subjects of taxation lying within 
its exclusive jurisdiction. It is true that uniformity in methods of 
dealing with tangible personal property is desirable, and diversity 
will produce certain inconveniences and difficulties ; but these, al- 
though undesirable, will not be so vital as to jeopardize the success 
of our plan, and will not involve any questions of interstate comity. 

Section 17. The next recommendation we make is that uni- 
formity in the methods of taxing tangible personal property is 
extremely desirable, and that every possible effort should be 
made to this end. A uniform tax date throughout each state, and 
even throughout the United States, is obviously to be desired. 
Uniform methods of valuation can in many cases be worked out. 
Our committee has not the information needed to enable us to 
make definite recommendations along these lines, but believes 
that practical results can be readily secured by committees of tax 
officials appointed by the National Tax Association. 



STATE AND LOCAL TAXATION 511 

Section 18. Our next observation concerning the taxation 
of tangible property is that effective administration is indis- 
pensable. Under purely local administration there never has 
been, and probably never will be, a satisfactory assessment except 
here and there in a few progressive localities. The primary work 
of assessment will, of course, continue to be done by local au- 
thorities ; but it is essential that such work should be supervised, 
and where necessary controlled, by a competent state tax com- 
mission or tax commissioner. To this subject we shall hereafter 
recur. 

Section 19. In the taxation of property under the plan pro- 
posed, certain special problems will be encountered. Public- 
service corporations, for example, are now frequently taxed by 
methods different from those applied to other classes of prop- 
erty, and must doubtless continue to be so taxed. Our plan, 
strictly applied, would require that only the tangible property 
o^ such corporations should be subject to taxation, and that the 
taxation of gross receipts and the ad valorem taxation of corpora- 
tions as going concerns should be abandoned. But such radical 
changes are not necessary, provided that existing methods are 
adapted to the general plan of taxation here outlined and certain 
adjustments are made in connection with the business tax which 
we herewith recommend. Uniformity of method, as we all know, 
is not necessary in order to secure substantial equality in taxa- 
tion, and all that can be required of any proposed system is that 
it shall produce substantial equality in its net results. 

We, therefore, do not recommend that either the taxation of 
gross receipts or the ad valorem taxation of public-service cor- 
porations as going concerns shall be discontinued wherever these 
methods are in successful operation. But we are obliged to point 
out that in many, and perhaps most, cases the amount of such 
taxation should be reduced or else that relief should be given 
to public-service corporations in connection with the business 
tax. When public-service corporations are assessed as going 
concerns, it is evident that they are more heavily taxed than 
other business enterprises which are subject to taxation merely 
upon their property, considered as property, and without refer- 
ence to their value as going concerns. When a corporate-excess 
tax is applied to all corporations, equality may then be secured 
between public-service corporations and other incorporated com- 



512 SELECTED READINGS IN PUBLIC FINANCE 

panics ; but it is evident that unincorporated concerns escape with 
a lighter tax than successful corporations are required to pay. 

It seems clear to the committee that when public-service cor- 
porations are assessed under an ad valorem system as going con- 
cerns, while other kinds of business are not, they are to-day 
discriminated against, and will be under our proposed system 
unless relief is given at some other point. The system we propose 
enables us to recommend such relief. We propose that, in addi- 
tion to the personal income tax and to the tax upon tangible 
property, there shall be a business tax as hereafter outlined. 
Wherever public-service or other corporations may continue 
to be taxed as going concerns by a method which involves the 
taxation of what is commonly called the corporate excess, or the 
good will, of such companies, we recommend either that they be 
wholly relieved of the business tax, or that the rate of such 
tax be reduced to a figure that will fairly offset the extra burden 
of taxation imposed upon them by the property tax. 

In the taxation of gross receipts a similar adjustment is neces- 
sary wherever such taxation is in lieu of, and is substantially 
equivalent to, the taxation that would otherwise be imposed 
under an ad valorem tax upon corporations as going concerns. 
Concerning the comparative merits of the tax on gross receipts 
and ad valorem taxation, it is unnecessary for us to express any 
opinion. We should probably be disinclined to recommend a 
change in the taxes on gross receipts now levied by such states 
as Minnesota, California, or Connecticut ; and we should be 
equally disinclined to recommend a change in the ad valorem 
system now in successful operation in a state like Wisconsin. 
Diversity of method is not inconsistent with real equality in 
taxation, and at this point we content ourselves with a mere ex- 
pression of our approval of the conclusions reached some years 
ago by the committee appointed by the National Tax Association 
to consider the Taxation of Public-Service Corporations.^ 

The recommendations which we make concerning public- 
service corporations are equally applicable to other classes of in- 
corporated companies. Our proposed system uniformly applied 
would require that stockholders and bondholders pay a personal 
income tax upon their interest and dividends, that the corpo- 
ration be taxed upon its tangible property, and that finally the 

1 Proceedings of the Natio7ial Tax Association, Vol. VII, pp. 372-383. 



STATE AND LOCAL TAXATION 513 

corporation pay a business tax in any locality where its operations 
are carried on. But it will not be inconsistent with the general 
plan if particular states prefer to continue other methods of 
taxing the property of corporations, provided that they make 
the adjustment we have recommended in connection with the 
business tax. It would merely serve to divert attention from 
the general plan we recommend if we undertook at this time 
a detailed examination of the merits and demerits of the various 
methods now employed in the taxation of business corporations. 

Section 20. In the taxation of national banks a special com- 
plication arises on account of the limitations imposed by the 
federal statute which now controls the taxation of shares of the 
capital stock of these institutions. The result, as we all know, 
is that at present the states are confined to the taxation of all 
banks, state and national, by a single method. It is also a fact 
that, when bank shares are taxed upon their full value at the pre- 
vailing local rates of taxation, they are taxed more heavily than 
most other classes of property under the property tax. The 
solution of the difficult}^ is not easy to find, and the committee 
has not attempted to provide one. P'or the purpose of this report, 
we prefer to call attention to the situation, and to recommend 
that the National Tax Association appoint a special committee 
to work out a plan of taxing banking institutions in a manner 
consistent with the general scheme of taxation here outlined. 

Section 21. Mines and other mineral properties also present 
peculiar difficulties arising from the nature of the mining busi- 
ness. In the time at its disposal the committee has been unable 
to consider, except in a general way, the subject of the taxation 
of mines, and only a. few of its members are qualified to deal with 
the subject. We are agreed that mines should pay, under what- 
ever method may be adopted, a tax commensurate with that paid 
by other real estate in the same taxing district. But further than 
this we are unable to go at this time. In view of the peculiar 
nature of the industry, we are of the opinion that the subject of 
mining taxation should be considered by a special committee ap- 
pointed by the National Tax Association, and we so recommend.^ 

1 Acting on this recommendation of the committee, the executive committee 
of the National Tax Association has authorized the appointment of a special 
committee to investigate the subject of the taxation of mines and other mineral 
properties. 



514 SELECTED READINGS IN PUBLIC FINANCE 

Section 22. Forests as well as mines present peculiar prob- 
lems which seem to us to need consideration by a committee 
possessing special qualifications for the task. We are of the 
opinion that no special favors should be extended to owners of 
forest lands; but we are impressed by the fact that many stu- 
dents of the subject are of the opinion that an annual property 
tax discriminates against forest properties, and discourages the 
adoption of rational forestry practice. We are unwilling to 
express any opinion upon this subject ; and we therefore recom- 
mend that the National Tax Association appoint a special com- 
mittee to investigate the subject of the taxation of forests. 

These are the principal problems to which the committee de- 
sires to call attention. Doubtless there are others, connected 
with the taxation of ships, of machinery, and perhaps of mer- 
chandise, which may well require further study by special com- 
mittees; but concerning them we make no recommendations at 
this time. 

V. The Proposed Business Tax 

Section 23. If it had been possible to reconcile in a satisfac- 
tory manner the legitimate claims of the several states of the 
American Union without recommending, in addition to the in- 
come and property taxes, a separate tax upon business, the 
committee would have preferred to do so. But we find that 
many states are now levying what are in name or in fact busi- 
ness taxes, upon the theory that they have a right to levy taxes 
upon business done within their jurisdiction. This claim appears 
to us to be reasonable, and we find no other method of satisfying 
it that is consistent with interstate comity, except that of levying 
a properly constituted business tax as a part of the proposed 
system. Perhaps the decisive consideration in the minds of the 
committee is that the income taxes which are now being intro- 
duced in a number of the states generally combine the idea of 
personal with that of business taxation in a manner which, if it 
continues and is extended, will necessarily result in a large 
amount of unjust double taxation. These income taxes are im- 
posed upon residents, on the theory that a citizen owes a personal 
obligation to the government under which he lives ; and they 
are also imposed upon incomes earned within thi states by non- 
resident individuals and corporations, upon the theory that since 



STATE AND LOCAL TAXATION 515 

the business is carried on there the income from the business is 
properly subject to taxation. The result is in many instances a 
new form of unjust double taxation of interstate industries and 
investments, which is likely to increase unless a suitable remedy 
is found.^ 

The committee is also influenced by the fact that the many 
taxes now imposed upon business, in the form of licenses or 
otherwise, by various states are an important factor in the whole 
problem of state and local taxation, which has usually been neg- 
lected, or even ignored, in discussions of the subject. These 
taxes are frequently illogical in their structure, and unequal and 
vexatious in their practical operation. No plan of state and 
local taxation can possibly ignore their existence, since there is 
no likelihood that the states will surrender the right to tax busi- 
ness carried on within their jurisdictions. Viewing the matter 
from this angle, therefore, we are convinced that a properly 
constituted business tax must be included in our proposed sys- 
tem of taxation. To those who may be inclined to question the 
wisdom of adding a business tax to the proposed combination 
of income and property taxes, we suggest that the committee 
is not recommending anything novel to American experience, 
but is merely proposing to reorganize upon a rational and equal 
basis a form of taxation that is now prevalent in many of our 
states and is not likely to be abandoned except for some better 
form of business taxation. 

It may be well to add also that for such a combination of 
income, property, and business taxes there are precedents in the 
legislation of other countries. The original French system of 
direct taxation established by the Constituent Assembly pro- 

1 The difificulty is only partly remedied by provisions for taxing in any state 
where business is carried on only a proportionate part of such business. If a 
resident of one state receives dividends from shares of a corporation which owns 
a plant in a second state and carries on business in a third where it is subject to 
taxation upon an amount of income corresponding to the business transacted in 
that state, the stockholder's dividends will be taxable in the first state under the 
theory of personal taxation, the property and part of the corporation's income 
will be taxed in the second state under the general property tax, and a part of 
the income will be taxable in the third state ; whereas, if the stockholder had 
lived in the state where the plant was located and the corporation had done all 
its business in that state, only one tax would have been levied in respect of the 
corporation's income. 



5i6 SELECTED READINGS IN PUBLIC FINANCE 

vided for a personal tax, which was regarded as a substitute for 
an income tax, a tax upon land and buildings, and a tax upon 
business. Other taxes were subsequently added to the original 
system, but the three taxes just mentioned have continued down 
to the present day. In the principal German states an income 
tax has been combined with taxes levied upon land, buildings, 
and business, in a manner similar in principle, though' not in its 
application, to the system of direct taxation established in 
France in 1791. There is, therefore, no lack of precedents for 
the recommendation which the committee has made. 

Section 24. In the taxation of business various methods may 
be employed. The tax may be levied in the form of a license 
or as an ordinary tax. Its amount, if not a fixed sum, may be 
determined with reference to the net income of a business enter- 
prise, the gross receipts, the rental value of the premises occu- 
pied, the size of the town or city in which the establishment is 
located, the number of employees or the number of machines in 
use, or, finally, the amount of raw materials used by a manu- 
facturing enterprise or the amount of goods purchased by a 
mercantile concern. In some cases, as that of the French busi- 
ness tax, a number of these elements are taken into account in 
determining the amount of a taxpayer's contribution. Generally 
considered, the various methods resolve themselves into three : 
first, the imposition of a tax of fixed amount ; second, the levy 
of a tax upon net income; and third, the adoption of various 
external indicia, such as gross receipts, rentals, and the like, 
which are considered to be approximately fair indications of 
the profits of a business. 

It is evident that a tax of fixed amount, such as is often im- 
posed by license taxes, even though the amount may vary for 
different trades and occupations, cannot, on account of its in- 
equality, be recommended as an adequate method of taxing 
business. In connection with licenses imposed upon certain occu- 
pations chiefly for the purpose of police regulation, a charge of 
fixed amount may be entirely wise and unobjectionable. But 
the case is very different with a tax levied with a view to 
obtaining revenue. 

External indicia of business profits may be adopted as the 
basis of a system of business taxation with very tolerable results. 
They produce a certain amount of inequality, since none of the 



STATE AND LOCAL TAXATION 517 

indicia can lead to anything but a very rough approximation of 
business profits. A combination of several indicia, such as gross 
receipts, rental values of premises occupied, and the number of 
employees, might, together with a proper classification of occu- 
pations and a carefully adjusted schedule of rates, result in a 
form of business taxation that would operate as well as, let us 
say, the French business tax. But administrative difficulties 
multiply as the basis of taxation is made more complicated, so 
that ultimately a point is reached where such a system becomes 
less convenient and in some ways more troublesome than a 
system which at the start adopts net income as its basis. 

Section 25. The committee has come to the conclusion, there- 
fore, that the proposed business tax should, except in certain 
cases, be levied upon the net income derived from business car- 
ried on within the state levying the tax. Prior to the coming of 
the federal income tax, it would probably have been unwise and 
impracticable to adopt net income as the basis of business taxa- 
tion. But to-day every business concern of any considerable size 
is obliged to make a return of its net income to the federal 
government ; and it is, therefore, both practicable and convenient 
to impose a business tax upon net income. This will involve, 
of course, in the case of interstate concerns, the determination of 
the proportion of the income derived from business carried on 
in each state. But there are practicable methods of making such 
a determination, so that no serious difficulty need arise at this 
point. With proper administration, we believe that a tax thus 
levied upon net income will be so far superior to any tax levied 
according to external indicia of business profits that there can 
be no doubt concerning the advisability of adopting it. 

There may, however, be certain cases in which an exception 
should be niade to the general rule. Concerns so small as to be 
exempt from the federal income tax might be taxed upon their 
gross receipts, their gross purchases, or the rental value of the 
premises occupied, with the provision that the tax in no case 
should be less than a certain minimum amount, perhaps $2. In 
any case where the apportionment of net income from an inter- 
state business is peculiarly difficult, it may be that an adequate 
tax upon gross receipts within the state should be substituted 
for a tax upon the net income. The desire to secure equality 
should not lead us to adopt a Procrustean method, which per- 



5i8 SELECTED READINGS IN PUBLIC FINANCE 

mits of no adjustment to meet special cases. But we believe that 
only genuinely exceptional cases require any departure from the 
general rule, and suggest that the burden of proof rests very 
decidedly upon anyone who asks for exceptional treatment. 

Section 26. Obviously the rate of the business tax should be 
proportional and not progressive. Neither the absolute amount 
of the net income nor the relation it bears to the invested capital 
has any bearing upon the question of how much a business con- 
cern should pay for the benefits it derives from the government 
under which it carries on its business. A concern which invests 
a large capital, and therefore earns a large income, cannot be 
assumed to benefit more than in direct proportion to the size of 
its investment or the amount of its income; while the relation 
of the income to the invested capital is an indication of the suc- 
cess with which the business has been managed rather than the 
amount of public service which it has received. Moreover, in 
practice, graduation of rates will produce difficulties which are 
bound to react unfavorably upon the general administration of 
the law, since it will produce in many cases absurd results which 
cannot be remedied except by the arbitrary discretionary action 
of the tax officials. 

The actual rate of the tax should be moderate. Where the 
business requires the employment of a substantial amount of 
tangible property, the business tax will be in addition to a tax 
paid upon that property ; and in cases where the business em- 
ploys little or no property in a particular locality, it is evident 
that the concern is making but comparatively small demands 
upon the services of the government. One per cent of the net 
income derived from business done in the locality would be a 
very light tax; and we believe that, in general, a tax of 2 per 
cent of such income would be adequate. Exceptional conditions 
in particular states may justify higher rates, but we believe that 
the rates in no case should exceed 5 per cent, and that very ex- 
ceptional conditions would be required to justify such a high rate 
for a business tax levied as a part of such a system as we propose. 

Section 27. It seems clear to us that the administration of 
a business tax must be placed in the hands of the state tax 
commission or tax commissioner. All the considerations which 
make it desirable that the personal income tax should be ad- 
ministered by state rather than by local officials apply with 



STATE AND LOCAL TAXATION 519 

equal force to a business tax levied upon net income; while 
there is the further fact that, if the state administers the per- 
sonal income tax, it can administer the business income tax more 
conveniently, economically, and efficiently than an.y county or 
municipal authorities. The same is true of any tax that may be 
levied in exceptional cases upon gross receipts in lieu of net 
income. Upon the other hand, taxes levied in exceptional cases 
upon the basis of rental values, or levied in fixed amount upon 
particular occupations requiring special police regulation, may 
be left to local administration. 

Section 28. The proceeds of the proposed business tax may 
well be divided between the state and local authorities in due 
proportions. Our recommendation is that the states retain a 
proportion corresponding to that which state revenues or ex- 
penditures bear to the total state and local expenditures or 
revenues, and that the remainder should be turned over to the 
taxing district in which business is carried on. The details of the 
plan of distribution may well vary from state to state, but this 
general rule seems to us a satisfactory general guide.^ 

Section 29. It goes without saying that the business tax we 
recommend is proposed as a substitute for all existing business 
taxes. The diversity, multiplicity, and inequality of the exist- 
ing taxes levied upon business by both state and local authorities 
in many commonwealths have long constituted serious evils, and 
the time has certainly come when better methods should be 
adopted. Unless the business tax is imposed by a single assess- 
ment, the revenue being distributed as we propose, it is obvious 
that the desired end will not be accomplished. There is great 
need of a simple system, admitting as few exceptions as possible, 
and uniform so far as practicable in all the states which desire 
to levy business taxes. There is need also of better administra- 
tion, which can be secured only through state authorities, as we 
have recommended. We are proposing, in fine, the adoption of 
a comparatively simple and uniform system of business taxation 
in place of the multifarious, vexatious, and frequently unequal 
methods now employed in many of our states. 

In concluding this subject, we may point out that under our 
proposed system there is no necessity that any state which pre- 
fers to dispense entirely with business taxation, except minor 

1 See, however, page 531. 



520 SELECTED READINGS IN PUBLIC FINANCE 

license taxes such as are everywhere imposed for police pur- 
poses, should adopt a business tax if it prefers not to do so. 
It may well be that some states will consider that a personal 
income tax and a tax levied upon tangible property meet fully 
the needs of their situation, and may, therefore, be reluctant to 
adopt the third proposed tax. To such we say that there is no 
necessity of doing so if a state is willing to renounce completely 
the claim to impose a tax upon business, as business, simply 
because it is carried on within its jurisdiction. A state will do 
nothing opposed to interstate comity, will impose no unjust 
double taxation, and will not interfere with any other state which 
desires to impose taxes upon business, if it decides not to assert 
the principle upon which the taxation of business is founded. 
This will mean necessarily that non-resident individuals and cor- 
porations employing little or no tangible property within its 
jurisdiction, but carrying on business and earning substantial 
profits there, will not be required to contribute to the support of 
its government. We have nowhere asserted that it is every 
state's duty to make such persons or business concerns con- 
tribute, but have merely recognized that it is reasonable for any 
state to do so if it desires. Our argument has merely been that, 
if interstate comity is to be respected and unjust multiple taxa- 
tion avoided, any state that taxes business must levy a tax upon 
all business done within its limits, whether conducted by in- 
dividuals, partnerships, or corporations, and must not levy its 
personal income tax or its taxes upon property or corporate 
franchises in such a manner as to impose unequal, and therefore 
unjust, multiple taxation upon interstate business and invest- 
ments. We have, in a word, undertaken to provide a reasonable, 
fair, and practicable method of business taxation which any 
state can employ consistently with the rules of interstate comity ; 
but we have not argued that every state ought to adopt this 
form of taxation, irrespective of its particular situation and 
fiscal needs. 

.VI. Summary of the Proposed System of Taxation 

Section 30. At this point it is desirable to consider as a whole 
the proposed system of taxation. In the first place, it is evident 
that this system will satisfy every legitimate claim of any Amer- 
ican state. It provides that all persons shall be taxed fairly and 



STATE AND LOCAL TAXATION 521 

fully at their place of domicile for the personal benefits they 
derive from the government. It provides that all tangible prop- 
erty which any state may desire to tax shall be taxed fully at its 
situs for the governmental services it there receives. It elimi- 
nates the taxation of intangible property, as property, because 
such taxation cannot be carried out without a large amount of 
unjust double taxation. And, finally, it provides a method by 
which any state which desires to tax business may do so in a 
fair and effective manner. No single tax levied either on income 
or property could possibly satisfy all of these claims, unless all 
the states, by formal agreement, should adopt a plan by which 
one tax would be levied upon interstate business and investments, 
the proceeds of which would be distributed in some agreed pro- 
portions between the states of domicile, the states where prop- 
erty is located, and the states in which business is carried on. 
Such an agreement we believe it is impossible to secure ; and we 
have, therefore, recommended three separate taxes, each of 
which can be levied in such a manner as to enforce fully, fairly, 
and consistently the taxation of the subjects it is intended to 
reach. 

Section 30(a). In the second place, it is evident that the com- 
bination of taxes we have recommended will give better results 
than any one tax, however levied, which is made to yield the 
same amount of revenue. With the best-drawn law and the 
very best of administration, there will always be a certain amount 
of inequality in the operation of any tax. If, therefore, all the 
revenue needed is derived from but one tax, such inequality as 
inevitably arises will be concentrated at a few points where it 
cannot be mitigated. But under a system by which the same 
amount of revenue is collected from separate taxes levied upon 
income, property, and business, it is clear that such inevitable 
inequalities as arise in the working of any one tax may be, and 
to a considerable extent must be, offset or mitigated by inequali- 
ties arising under the others. By the mere law of probability, it 
must happen that the inequalities arising under the three sepa- 
rate taxes will not all be concentrated at the same points, and 
that some of them will to a certain extent compensate for others. 
This is one of the reasons why a double system of income and 
property taxation has worked well in certain European countries 
and has met with increasing favor from students of taxation and 



522 SELECTED READINGS IN PUBLIC FINANCE 

practical administrators. We regard this compensatory action 
of the three taxes we have recommended as an important argu- 
ment in favor of our proposals. 

Section 31. A third point to be emphasized is that the system 
here recommended will bring about heavier taxation of funded 
incomes than unfunded, without requiring the states to under- 
take the very difficult task of differentiating the rates of their 
income taxes. That funded incomes should be more heavily 
taxed than unfunded, nearly all will agree. At the same time, it 
is certain that the attempt to levy an income tax at different 
rates on different kinds of income greatly complicates the ad- 
ministration of the tax, and raises difficult problems which any 
one familiar with the practical side of tax administration would 
desire to avoid. But it is evident that, by combining- a tax upon 
property with a tax upon income, we shall in effect impose heavier 
taxation upon funded incomes ; and therefore the net result of our 
tax system Avill be to secure differentiation without undertaking 
the very difficult task of differentiating the rates of the income tax. 

Section 32. Finally, the committee desires to point out that, 
although the proposed system prescribes certain lines of action 
which must be followed if interstate comity is to be observed, it 
admits of considerable elasticity at other points. The personal 
income tax does, indeed, require definite rules which cannot be 
violated without undesirable results. It must be levied upon 
persons at their place of domicile, and must not be levied upon 
the income from property at its situs or the income from busi- 
ness at the place where business operations are carried on. The 
property tax, however, permits of such adjustments in the taxa- 
tion of corporations, mines, forests, and certain other things as 
m.ay be necessary to fit existing taxes into the proposed system 
or to improve existing methods which may be deemed to be 
unsatisfactory. The business tax also permits such adjustments 
as may suit the conditions of different states. The committee is 
obliged to insist that, if such a tax is levied, it should be levied 
equally upon all business carried on within the state, under what- 
ever form of organization it is conducted, since this is the only 
manner by which unfair burdens on interstate business can be 
avoided. But we see no reason why every state ought, from the 
nature of the case, to impose business taxes ; and while we recom- 
mend a tax upon net income as the best form of business tax, 



STATE AND LOCAL TAXATION 523 

we have pointed out that in special cases taxation upon the basis 
of external indicia may be preferable and entirely consistent 
with our general plan of taxation. 

Section 33. A word should be said concerning the relation of 
our plan to the classified property tax which for some years has 
played no unimportant part in discussions of state and local 
taxation. It is evident that the flat tax upon intangibles, which 
is a part of every classified property tax, is unnecessary under 
the scheme we propose. The purpose of the tax on intangible 
property is chiefly to enforce the principle that every citizen, no 
matter where his investments are located, should pay a direct tax 
to the government under which he is domiciled. It is evident 
that this purpose is fully carried out by the personal income tax 
which we have recommended, and, therefore, we have not recom- 
mended any tax on intangible property as a part of our pro- 
posed plan. With intangibles eliminated from the operation 
of the property tax, we have left only the question of how tan- 
gible property shall be treated ; and we have recommended that 
tangible personal property be separated from real estate and 
made subject to a lower rate of taxation. It will be seen, there- 
fore, that, so far as tangible property is concerned, our plan is 
based upon the idea underlying the classified property tax, and 
that. our plan differs from the latter chiefly by reason of the fact 
that it eliminates wholly the taxation of intangible property. 

The relation of existing state income taxes to the proposed 
plan should also be considered briefly. The Wisconsin income 
tax is in part a personal income tax like that which we propose, 
and in part a tax upon business income. A part of it, therefore, 
would find its place naturally in our proposed personal income 
tax, and the other part could readily find a place in our proposed 
business tax. The Massachusetts income tax is throughout its 
entire structure a personal tax, since it is in no case levied upon 
non-resident persons or interests. It is, therefore, a proper 
nucleus for a personal income tax, but fulfills in no respect the 
functions of our proposed business tax. The corporation in- 
come taxes of Connecticut, New York, West Virginia, and 
Montana may be classified as business taxes, and with certain 
modifications can readily meet the requirements of our system. 
Some of the other state income taxes, which have been modeled 
after the federal income tax, are more difficult to classify and 



524 SELECTED READINGS IN PUBLIC FINANCE 

violate some of the principles we have advocated; but they at 
least serve to establish the principle of state taxation of income, 
and can be remodeled in a manner conforming to the require- 
ments of the plan we propose. 

VII. Tax Administration 

Section 34. Since the best tax laws will not work satisfac- 
torily if they are badly administered, the committee desires to 
submit some observations and recommendations concerning ad- 
ministration. It is well known that many of our states, by creat- 
ing tax commissions or appointing tax commissioners, have 
greatly improved the administration of their laws in recent 
years; but it is also known to all that, taking the country as a 
whole, there is still need of great improvement in tax adminis- 
tration. We have already made several recommendations con- 
cerning the administration of the particular taxes which we have 
proposed, but we are unwilling to submit our new system with- 
out considering more broadly and generally the subject of 
administration. 

Section 35. In the United States the assessment of prop- 
erty has always been entrusted to local officials, and doubtless 
will continue to be performed by local agencies. The local asses- 
sor, therefore, is a vitally important part of our system of 
administration ; and if his work is not well performed, no mere 
process of correction will ever bring about a good assessment of 
property. We are in complete agreement with the conclusions 
reached by the committee appointed by the National Tax Asso- 
ciation a few years ago to consider the subject of the adminis- 
tration of tax laws.^ Besides endorsing the findings of that 
committee, we desire in this report to make the following specific 
recommendations : 

A. Assessment districts should be large enough to justify the 
employment of at least one permanent official in each such dis- 
trict, who should receive a salary sufficient to make it possible 
for him to give all his time to the work. Such permanent asses- 
sors should be provided with well-equipped offices, a suitable 
number of permanent clerks, and such part-time assistants as 

1 For the "report of this committee, see Proceedings of the National Tax 
Association, Vol. IX, pp. 197-207. 



STATE AND LOCAL TAXATION 525 

may be needed for a short period in each year. Even if assess- 
ments are not made annually, there is always enough work of 
investigation and of keeping track of new developments to 
justify the employment of a permanent force. At present many 
assessment districts are too small to make proper compensation 
possible ; and the result is that the work is done by persons who 
cannot give to it the time it ought to receive and seldom acquire 
the necessary expert and technical knowledge. Manifestly, the 
county is a better assessment district than the township ; and, 
generally speaking, we may suggest that it is undesirable to 
erect assessment districts smaller than a county, unless such 
districts have a sufficient population to enable them to employ 
at least one permanent assessor and a suitable staff. 

B. Whether assessors should be appointed or elected is a 
question about which there may be room for difference of 
opinion. The committee, however, favors strongly the method 
of appointment, since it does not believe that, other things being 
equal, elective officials can or will perform their work as effx- 
ciently as appointive. Recognizing, hov/ever, that there may be 
serious difference of opinion at this point, we make no specific 
recommendation ; and content ourselves with recommending that, 
whether assessors are elected or appointed, they should serve for 
a term of at least four years in order that there may be reason- 
able continuity in their work and that there may be time for 
their policies to justify themselves by their results. 

C. We recommend that all assessors, whether elected or ap- 
pointed, be subject to removal for willful negligence or mal- 
feasance in office. This powxr of removal should be placed in 
the hands of the state tax commission, which should be author- 
ized, either upon complaint or upon its own motion, and after 
hearing all parties in interest, to remove a local assessor from 
office. This power is now given to the tax commission in cer- 
tain states, and has led to excellent results. Even though seldom 
exercised, the very existence of such a power tends to prevent 
many abuses and to secure a more efficient administration of 
tax laws. 

Section 36. That a permanent state tax commission, or tax 
commissioner, should be established in every state, is a recom- 
mendation which to-day requires no argument to support it. 
We will merely say that neither the system of taxation which 



526 SELECTED READINGS IN PUBLIC FINANCE 

we recommend nor any other can be expected to give satisfac- 
tory results in states that refuse to place in the hands of some 
permanent central authority the administration of taxes upon 
incomes and inheritances, the original assessment of certain 
classes of property, and general supervisory powers over the 
assessment of all property subject to local taxation. 

How this central authority should be constituted is naturally 
the next subject for consideration. We believe that experience 
has abundantly proved that a state board constituted of ex-officio 
members is totally inadequate for the work in hand. The mem- 
bers of such a board have other duties and responsibilities which 
have first claim upon their interest and time, so that they never 
become experts in taxation and seldom give adequate attention 
to their work as members of a tax commission. In states which 
are content to vest in ex-officio boards central control over the 
administration of their tax laws, we cannot expect satisfactory 
results from our proposed system of taxation, or, indeed, from 
any other. 

Whether a tax commission is to be preferred to a single com- 
missioner is a point upon which there is certainly room for dif- 
ference of opinion. In many, if not most, of the states that have 
tax commissions it would have been impossible to secure enact- 
ment of laws vesting in the hands of a single commissioner the 
authority given to the commissions. Upon the other hand, some 
states have developed strong and efficient tax departments under 
the authority of a single commissioner, and evince no desire to 
change this arrangement. It is also true that the internal taxes 
of the United States are collected by a department which has at 
its head a single commissioner. The committee believes, there- 
fore, that there is no reason to suppose that a commission is 
always to be preferred to a single commissioner, or that a tax 
department with a single head is always to be preferred to a tax 
commission; and concludes that the important thing is the ade- 
quacy of the resources and extent of the authority conferred 
upon the state tax department. 

Where the commission exists, the members should be ap- 
pointed, in classes, for terms of at least six years. Provision 
should be made that all the members of the commission should 
not belong to the same political party, and every effort should 
be made to remove their appointment from politics. The salaries 



STATE AND LOCAL TAXATION 527 

paid should be adequate to secure men of first-class ability, and 
removal from office should be authorized only for cause and 
after due hearing of all parties in interest. 

The powers of the tax commission should include: (a) orig- 
inal assessment of all property or business that has a state-wide 
rather than a local character, all financial institutions, and pub- 
He utility companies of every description;^ (6) the assessment of 
the personal income tax and the tax on business incomes which 
we have here recommended, also the administration of inherit- 
ance taxes and any other state transfer taxes ; (c) the equaliza- 
tion of property assessments for the purposes of state taxation 
and the equalization of county assessments whenever there are 
different assessment districts within a county;^ (d) directive 
and supervisory power over the assessment of property, includ- 
ing the power to order reassessments and, if necessary, to appoint 
appraisers to reassess any property that local officials have not 
assessed in accordance with the law ; (e) power of removal, after 
a hearing, of local assessors for inefficiency or misconduct ; 
(/) authority to act as board of appeal in such cases as may be 
necessary; and (g) authority to investigate the entire subject of 
taxation, and to gather and publish comprehensive statistics 
concerning all matters of taxation and public finance. 

Section ^7. The committee has recommended that the pro- 
posed personal income and business income taxes should be 
administered by state rather than local authorities, and in the 
previous section we have pointed out that the state tax commission 
or tax commissioner should be entrusted with this vv^ork. For 
this purpose it is very desirable, and even necessary if the best re- 
sults are to be secured, that a state should be divided into income- 
tax assessment districts of convenient size, each of which should 

1 Certain other classes of property, such as mines, may well be included in 
this list, but we will not undertake further specification. 

2 This recommendation means, of course, that there should be no separate 
state board of equalization. We are aware that in certain states where there are 
no tax commissions there are state boards of equalization which now possess 
some of the functions of a tax commission, and may at any time be clothed with 
other such functions. Such boards should be, as fast as possible, developed into 
competent tax commissions of the type that we recommend. Whether they would 
better retain their present names or be known as tax commissions is probably 
not a matter of great importance ; but we venture to express our preference for 
the latter name. 



528 SELECTED PLEADINGS IN PUBLIC FINANCE 

be placed in charge of a district assessor of incomes, appointed 
by the state tax commission, or tax commissioner, and directly 
responsible to the same authority. The success of the Wisconsin 
and the Massachusetts income-tax laws is due in large part to 
the fact that the administration was placed wholly in the hands 
of the state tax departments. But it was due also, in no small 
degree, to the work of the district assessors who served the use- 
ful purpose of bringing the administration of the law home to 
the people of the several districts and helpfully decentralizing 
the work of administration. In the more populous states we 
believe that such a district organization is necessary for the suc- 
cessful operation of income taxes ; and we, therefore, strongly 
recommend it. In the less populous states, it may be necessary for 
the state tax department to deal directly with all persons subject 
to the income tax. In all states the establishment of an income- 
tax bureau within the state tax department is absolutely essential. 
It is obvious- that district assessors of income may be advan- 
tageously utilized in the general supervisory work of the state 
tax commission or commissioner. Wisconsin now employs dis- 
trict assessors of income as supervisors of local assessors within 
their districts, and thus has established a useful connecting link 
between the state tax department and the local assessing boards. 
On other grounds, such an intermediary between the state and 
the local taxing authorities is very desirable; and w'e, therefore, 
point out that the establishment of district assessors of incomes 
will facilitate greatly the carrying out of the supervisory powers 
with which every state tax department ought to be clothed. 

VIII. The Inheritance Tax 

Section 38. In this report the committee has preferred to 
make no specific recommendation concerning the taxation of 
inheritances. Such taxes are now in operation in almost every 
state, and it is certain that they are a permanent part of our 
system of taxation. The committee strongly favors the use of 
the inheritance tax by the /Vmerican states, and is in general 
accord with the various recommendations which have been made 
from time to time by committees appointed by the National Tax 
Association. We have felt obliged, however, to devote our 
attention principally to other subjects concerning which there is 



STATE AND LOCAL TAXATION 529 

greater diversity of opinion and greater need for thoroughgoing 
reforms. It is clear that none of our recommendations, if car- 
ried out, will interfere in any way with the levy of inheritance 
taxes by the states ; and we have, therefore, concluded that 
further study of this subject could properly be left to some other 
committee, or undertaken by our committee in some subsequent 
year. Our decision is due solely to limitations of time, and does 
not imply lack of appreciation of the importance of the inherit- 
ance tax in any rational system of state taxation. 

IX. Taxes upon Consumption 

Section 39. In the course of its deliberations, the committee 
has had occasion to consider whether, in view of the great in- 
crease of state and local expenditures in recent times and the 
entrance of the federal government into the field of direct taxa- 
tion, which had hitherto been utilized exclusively by the states, 
it might be possible for the states to derive more revenue than 
in the past from taxes levied upon consumption. The taxes now 
levied by the states upon automobiles represent the sort of taxes 
which the committee has in mind. Taxes upon amusements, on 
non-alcoholic as well as alcoholic beverages, on hunting licenses, 
and a few other things, have been brought to our attention ; but 
we have decided to make no recommendation upon the subject 
at this time. It is perfectly evident that, with the exception of 
automobiles, none of the taxes which have been suggested will 
ever be likely to constitute an important source of revenue ; and 
we have preferred to concentrate attention this year upon the 
problems of chief practical importance. It may well be, however, 
that at some future time the National Tax Association will do 
well to appoint a committee to canvass carefully the possibility 
of supplementing existing sources of state and local revenue by 
taxes levied upon what may be fairly classified as, luxurious 
consumption. 

X. The Separation of the Sources of State and Local 

Revenues 

Section 40. The proposal to separate the sources of state and 
local taxation has played a sufficiently important part in pre- 
vious discussions of tax reform to justify a brief consideration 



530 SELECTED READINGS IN PUBLIC FINANCE 

of that subject. We may first observe that the plan we propose 
does not require any separation whatever of the sources of 
state and local revenue, but that it is not inconsistent with the 
adoption of a thoroughgoing scheme of separation. Under our 
plan, it would be possible for many states to raise from the 
personal income tax a sufficient sum to defray the entire 
expense of the state government, so that the taxation of prop- 
erty could be turned over wholly to the local authorities ; while 
the revenue from the business tax, although collected by the 
state, could either be retained by the state or distributed to the 
local governing units. We refer to this fact merely to empha- 
size our remark that the plan we have proposed will neither 
prevent the states from adopting the plan of separation, if they 
so desire, nor compel them to do so, if they prefer not to 
experiment with that plan. 

The committee is of the opinion that a partial separation of the 
sources of state and local revenue is desirable, but that complete 
separation, by cutting the connecting cord between the state and 
local governments, tends to destroy the states'- sense of responsi- 
bility in the matter of local taxation. There is no experience to 
justify the belief that, if the states turn over to the local govern- 
ments independent sources of revenue, and adopt the theory 
that local taxation is an affair of purely local interest, we shall 
ever have a satisfactory administration of the tax laws by local 
officials. Experience abundantly shows that such officials need 
constantly the expert advice, intelligent guidance, and, when 
necessary, the effective control of a state tax commission com- 
posed of experts and keenly alive to the need of just and efficient 
administration of tax laws by local officials. Total separation 
of the sources of state and local revenue, at least in the forms in 
which it is usually presented, seems to the committee to be dis- 
tinctly a backward step, especially at this moment when the need 
is for greater emphasis upon state control over the taxation of 
property for local purposes. A further difficulty of complete 
separation is that the abolition of the direct state tax upon prop- 
erty tends to remove a desirable check upon state expenditures. 

The committee believes, however, that a partial separation of 
the sources of state and local revenue is desirable. The inherit- 
ance tax is obviously a proper source of state revenue. Taxes 
upon insurance companies and upon automobiles may very prop- 



STATE AND LOCAL TAXATION 531 

erly be allocated to the state rather than the local governments. 
Under special conditions it may be better that railroad taxes 
should be retained in the treasury of the state than utilized as 
a source of local revenue. From the taxes thus enumerated, it is 
obvious that states can, and should, derive revenues that are 
independent of local taxation ; but we believe that it is desirable 
that a state tax on property should be retained as the regulator 
of the state finances and a reminder to the state of its responsi- 
bility for the proper assessment of property in every locality 
within its jurisdiction. 

We have recommended that a part of the personal income tax, 
corresponding to the proportion which state expenditures bear 
to the total of state and local expenditures, be allocated to the 
state treasury. Such an arrangement will tend to lighten the 
direct state tax, but will not make such a tax unnecessary. 
We have pointed out that the distribution of the proceeds of 
the proposed business tax may well vary from state to state. We 
here suggest that whether the state should be assigned a share 
may well depend upon the comparative revenue needs of the 
state and the local governments. If the state tax is light, the 
entire revenue from the business tax may well be assigned to 
the local political units ; and if the state tax is heavy, it would 
follow that the state might well retain a share of the business 
tax. Here, as elsewhere, the system we propose permits of 
different adjustments to suit the varying conditions of our 
several states. 

XI. Amendment of State Constitutions 

Section 41. As has been repeatedly set forth in the publica- 
tions of the National Tax Association, it is certain that no 
important departures from the system of the general property 
tax are possible in many states under constitutional restrictions 
which provide that taxation must be uniform, equal, and pro- 
portional. That such constitutional limitations have, in fact, 
tended to secure neither uniformity nor equality in taxation, is 
also fully set forth in the Proceedings of the annual conferences 
of the National Tax Association and in various reports of special 
committees. Upon this subject the committee needs only to say 
that in states which are now limited by constitutional restrictions 
prescribing a uniform rule or method of taxation, no satisfactory 



532 SELECTED READINGS IN PUBLIC FINANCE 

adjustment of tax problems can be reached until such limitations 
are removed, or at least modified. There may be room for dif- 
ference of opinion concerning the form which constitutional 
amendments should take. Some states have preferred to adopt 
amendments authorizing specific departures from the uniform 
rule, while others have eliminated wholly the requirement of 
uniformity. The committee has concluded that it is unnecessary 
at this time to say more than that the plan of taxation which it 
recommends will require no more, and probably no less, amend- 
ment of state constitutions than any other plan adequate to the 
needs of the case. 



CHAPTER XIV 

PROBLEMS OF TAX ADMINISTRATION 

59. Central Control of the Valuation of Taxable Subjects: 
by Samuel T. Howe/ — The chairman of the Kansas Commission 
discusses in the following selection some of the results of the 
work of state tax commissions. 

The formation of the revenue systems of many of the states 
has not seemed to follow intelligent design. The systems have 
been built largely piecemeal ; have been guided in growth some- 
times by legislative thoughts of expediency, at other times by 
popular demands for changes in revenue measures inspired by 
the wiles of the demagogue who too often speculates upon the 
credulity of the uninformed, and at still other times by those able 
to influence legislation for their own selfish purposes. 

Until comparatively recently, administration of many branches 
of public business in the states has proceeded quite independently 
of expert or scientific knowledge, but within the past two or three 
decades many states have realized the benefits which have come 
to other governments through the employment of experts in the 
various lines of service and are taking over approved methods in 
order to have like benefits within their own jurisdictions. 

There is need of an educative movement so that the people may 
come to realize that there is in the land a great body of intelli- 
gent, able and high-minded students who by careful inquiry into 
past experiences of the race have become qualified to propose 
measures to law-making bodies which if placed on the statute 
books will greatly promote social welfare; and it should also 
become commonly known that large numbers of public servants 
in the various branches of service are earnestly seeking ways 
to improve the law and its administration so that the benefits 

1 Reprinted, by permission, from "Readjustments in Taxation," Annals of ths 
Aynerican Academy of Political and Social Science, Vol. LVIII, March, 191 5. 

533 



534 SELECTED READINGS IN PUBLIC FINANCE 

of government shall be enjoyed by citizens and its burdens borne 
by them in a relatively equal manner. 

In keeping with the modern centralization of productive ener- 
gies, there has been a centralization, though in much less degree, 
of governmental activities, much the larger part of the move- 
ment having occurred within the past one or two decades. 

Real equality in laying taxes upon property requires relatively 
equal assessments of all property in a given assessment district, 
for within the district the rate of tax for district purposes must 
be uniform. 

Some districts are a complex whole constituted by smaller dis- 
tricts as units, and may themselves be units in the formation of 
a still larger district. Ordinarily, a school district is the smallest 
area in which a particular tax rate is applicable ; but school 
districts are seldom assessment districts ; in combination with 
other like districts having different rates of levy for school 
purposes they form the township assessment district. 

The township-district tax rate varies among the township dis- 
tricts, and all such districts unite with city districts to form the 
county assessment district. The rates of tax vary among the 
county districts but are uniform over their respective areas, and 
the county districts are units in the formation of the state assess- 
ment district, where the state tax rate. applies to all property 
uniformly. 

Thus the unit assessment district least in area may be the 
township or the county. Under the township plan, values for 
county purposes are fixed according to the varying opinions of 
numerous assessors who are seldom chosen because qualified for 
the work. Under the county plan, one judgment fixes all values, 
and it hardly needs saying that uniformity in assessment is here 
possible while it is impossible under the other plan. 

Boards of equalization are functionaries common to the states, 
and as the name implies are designed to remove inequalities in 
the assessment. Experience shows that such boards are not able 
to furnish all the remedies provided by law. They lack a knowl- 
edge of the conditions which surround individual taxpayers, and 
do not have the time during the assessment period within which 
to acquire the information necessary to advise them as to the 
condition of all taxpayers in their respective jurisdictions, and this 
knowledge is a prerequisite to a removal of inequalities which 



PROBLEMS OF TAX ADMINISTRATION 535 

may occur in the local assessment. Individuals who coniplain in 
legal form may have relief, but those who lack the information 
of how to proceed to obtain relief and those who discover their 
grievances too late to apply for it must go without a remedy. 

It follows that equality in the original assessment is the indis- 
pensable condition of a real equality in laying taxes, and that 
the larger the area covered by one assessing power the greater 
will be the uniformity of valuation among taxpayers. 

Logically the centralization of the actual work of assessment 
should be with the authorities of the state district so long as the 
state tax levy is laid upon all property in the state ; but the 
great burden of taxation arises from local tax rates, and a cen- 
tralization of the assessment work in the county authorities 
with a directory and supervisory control by the state will afford 
a method both practical and expedient, and therefore suitable to 
achieve the desired end. 

Ideal centralization involves the control of the machinery of 
assessment, and this means of course appointive instead of 
elective assessors. In no other way than by appointment is it 
possible to select assessors because of their qualifications and to 
continue them under civil-service rules so long as they prove to 
be efficient. Centralization is thus necessary for general tax pur- 
poses, and the prevalent emphatic movement toward centraliza- 
tion affirms its desirability and expediency. 

However, the unsatisfactory results attending the assessment 
of certain forms of corporate property by a divided respon- 
sibility first led to centralization. It was quite early in the 
history of these corporations found to be utterly impracticable 
to assign to numerous persons the valuation of parts of a rail- 
road, a telegraph or a telephone line situated in the different 
districts through which the railroad or the other lines were con- 
structed, and soon it became the policy to create state boards to 
assess this class of property. The property of such corporations 
being usually public-service corporations and subject to local 
tax rates, justice required that it be assessed in a relatively equal 
manner with local property; but this proved to be a difficult 
proposition, because the railroad or other line was assessed by 
one authority at a uniform value in all the districts through which 
it passed, while local property as valued by the local authori- 
ties varied greatly in the different districts from the uniform 



536 SELECTED READINGS IN PUBLIC FINANCE 

value of the railroad or other line. Because of the resulting 
wide variation from a single standard of valuation there arose in- 
evitably the need of a central authority to place all property upon 
the same basis of actual value, and state boards of equalization, 
tax commissions or other central bodies were a natural growth. 

In 1842 there came a degree of centralization in New Hamp- 
shire, and in after years more or less centralization occurred in 
other states: in Indiana, in 185 1 ; Massachusetts, 1865; Dakota, 
1868 ; Kansas, 1869 ; Missouri, 1871 ; Illinois and Iowa, 1872 ; 
Arkansas, 1878 ; California and Wyoming, 1879 » N^^w York, 
1880 ; Vermont, 1882 ; New Jersey, 1884 ; North Dakota, South 
Dakota and Washington, 1890 ; Rhode Island, 1898 ; Wisconsin, 
T901 ; Nevada, 1903; Oregon, 1909; Ohio, 1910. 

The method was first developed largely in connection with the 
assessment of public-service corporations operated interstate 
or intercounty, but gradually the central bodies were reformed 
and given additional powers tending to the control of general 
assessments. 

Important powers lodged with permanent tax commissions 
or with bodies having analogous duties to perform are the 
following : 

The administration of oaths in all matters concerning proceed- 
ings in connection with the discharge of official duties. 

The formulation and promulgation of a uniform method of 
keeping tax rolls and other records relating to taxation, for use 
in all counties of the state. 

The formulation and promulgation for use in the several 
counties of all forms necessary in the listing, assessment and 
return of property and collection of taxes. 

Power to exercise a general supervision over and to direct 
county assessors in the performance of their duties. 

Authority to investigate generally the condition of the system 
of taxation throughout the state in order to report to the legis- 
lature needed changes in the system designed to promote a 
general equality of taxation. 

The power to require local officers having to do with assess- 
ment and the collection of taxes or the disbursement of public 
funds to report in such form as the central body may require, 
information bearing upon any investigation being made ; and in 
such investigation to call upon individuals and corporations for 



PROBLEMS OF TAX ADMINISTRATION 537 

information bearing upon the subject of taxation; to examine 
books and papers ; summon witnesses to appear and testify and 
to produce books and papers before it at a time and place to be 
appointed by it. 

Authority to prescribe all needful rules not inconsistent with 
law for the orderly, methodical and effective performance of its 
duties as a board of assessment or otherwise, and for conducting 
hearings and other proceedings before it. 

Authority to exercise a general supervision over the adminis- 
tration of the assessment and tax laws of the state, over the 
township and city assessors, boards of county commissioners, 
county boards of equalization and all other boards of levy and 
assessment to the end that all assessments of property, real, 
personal and mixed, be made relatively just and uniform. 

Power to confer with, advise and direct assessors, boards of 
commissioners, boards of equalization and others obligated under 
the law to make levies and assessments as to their duty under 
the statutes. 

Power to direct proceedings, actions and prosecutions to be in- 
stituted to enforce laws relating to penalties, liabilities and the 
punishment of public officers, persons and officers or agents of 
corporations for failure or neglect to comply with the orders of 
the central authority or with the provisions of law governing 
the return, assessment and taxation of property ; and to cause 
complaints to be made against assessors, county commissioners, 
county boards of equalization or other assessing or taxing offi- 
cers in the courts of proper jurisdiction for the removal from 
office for official misconduct or neglect of duty. 

Power to call upon the attorney general of the state or the 
county attorney of the respective counties to assist in the com- 
mencement and prosecution of actions and proceedings for penal- 
ties, forfeitures, removals and punishments for failure to observe 
the tax laws of the state. 

Power to require township, city, county, state or other public 
officers to report generally upon matters of taxation, and par- 
ticularly to make and prosecute research and investigation con- 
cerning the detailed properties of corporations, the business, 
income, reasonable expenditures and true values of the franchises 
and properties of all public-service corporations doing business 
in the state. 



538 SELECTED READINGS IN PUBLIC FINANCE 

Power to summon witnesses from any part of the state to ap- 
pear and give testimony and to compel such witnesses to produce 
records, books, papers and documents. 

Authority to cause the depositions of witnesses residing within 
or without the state or absent therefrom to be taken in accord- 
ance with the customary practice in taking depositions. 

Power to make appraisement and assessment of the property 
of all public-service corporations which are not confined to the 
limits of a single county. 

Power to require any county board of equalization at any time 
after its adjournment to reconvene and to make such orders as 
shall be determined to be just and necessary, and to direct and 
order such county boards of equalization to raise or lower the 
valuation of the property, real or personal, in any township or 
city, and to raise or lower the valuation of the property of any 
company or corporation ; and to order and direct any county 
board of equalization to raise or lower the valuation of any class 
or classes of property, and generally to do and perform any act 
or to make any order or direction to any county board of equali- 
zation or any local assessor which may seem just and neces- 
sary in order that all property shall be valued and assessed in 
the same manner and to the same extent as any and all other 
property, real or personal, which is required to be listed for 
taxation. 

Power to prosecute any member of any board of county com- 
missioners and any assessor for violation of any of the rules and 
regulations which may be prescribed by the central body, or the 
violation of any statute of the state relating to assessment of 
property and the collection of taxes. 

Power to prescribe a list of questions to be answered by tax- 
payers or other persons. 

Power to sit as a state board of equalization and to equalize 
the assessment of property throughout the state ; to equalize the 
assessment of all property in the state among persons, firms, or 
corporations of the same assessment district, among cities and 
townships of the same county, and among the different counties 
of the state, and the property assessed by the said central body in 
the first instance; the equalized value so fixed to be adopted as 
the assessment roll for the extension of all tax rates, state 
and local. 



PROBLEMS OF TAX ADMINISTRATION 539 

Power to order a reassessment of all or any part of the prop- 
erty assessed by the local authorities in any given assessment 
district; such assessment to be made by assessors appointed by 
the central body and the assessment to be made at the expense 
of the district so reassessed. 

Power to remove county assessors for dereliction in duty and to 
approve of the removal by the county assessor of deputy assessors. 

All of the above powers — and others of less importance not 
mentioned — have been given to one or more permanently or- 
ganized central bodies, and are illustrative of the modern tend- 
ency to organize the business of taxation upon lines of efficiency. 

The responsibility thus placed with some of the central bodies 
is very great, and calls for a large knowledge and a wise discre- 
tion in the performance of duty. Power, and an inclination to 
its full use, usually go hand in hand. Careful deliberation be- 
fore the exercise of authority is very important, and it will be 
found many times that power held latent but ready for use will 
be fully as effective for good as if it were exerted. 

One form of centralization is yet to come, and this will be in 
relation to corporations operating transportation and transmis- 
sion lines interstate. There is at least as much justification for 
a centralized assessment of the property of these corporations as 
there is for a central assessment of like property of lines crossing 
several districts within a given state. In fact, such centralization 
would seem to be more needed because under the irresponsible 
divided system now obtaining there is a tendency on the part 
of states to reach out and import values pertaining to property 
of public-service corporations operating interstate. Just how 
this centralization will come is a matter of speculation. The 
power of assessment may be lodged in a body raised by Congress, 
or the central body may be appointed jointly by the states in- 
terested, under some federal law of control, with proper provision 
for a division of the value of the property of particular lines of 
transportation or transmission among the states through which 
the lines are built. 

The revenue systems of the states are so diversified, and the 
duties required of central boards are so many and varied, that 
classification of the boards is very difficult. 

An interesting classification of central boards that are charged 
with the duty of corporate assessments in one form or another 



540 SELECTED READINGS IN PUBLIC FINANCE 

may be found in Part V of the valuable report of the federal 
commissioner of corporations on the taxation of corporations, 
made to the department of commerce. 

In the first class are included wholly ex officio boards or officers, 
and these exist in New York, Pennsylvania, Delaware, North 
Dakota, Iowa, Nebraska, Missouri, Montana, Idaho, Wyoming 
and New Mexico. (Since the report a permanent tax commission 
has been created in North Dakota.) 

In the second class are the boards, one or more members of 
v;hich are ex officio and the remaining members are specially 
chosen either by election or appointment. The boards of this 
class are found in Connecticut, Indiana, Illinois, Michigan, 
Oregon and California. 

The central authorities not classed as above indicated have 
memberships wholly selective and are in the follov>/ing states : 
Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, 
New York, New Jersey, Maryland, Ohio, Wisconsin, Minnesota, 
North Dakota, South Dakota, Kansas, Colorado, Utah, Nevada, 
Washington and Arizona. 

Boards or officers having central authority are variously named 
as follows : comptroller, auditor general, state treasurer, state 
auditor, secretary of state, state board of equalization, state 
executive council, state board of equalization and assessment, tax 
commission, state board of tax commissioners, state board of 
assessors, state board of appraisers, commissioner of taxes, etc. 

The classification mentioned above was prepared by the com- 
missioner of corporations with relation only to the central as- 
sessment of corporate property. To harmonize with what is 
here said a different arrangement is needed. The nomenclature 
of the central authorities is so varied that one or another name 
must be selected to designate a class of which the members 
may be variously styled. A consideration of the functions of 
the central authorities naturally suggests a threefold classi- 
fication, i.e. : 

I. Authorities that are charged only with the assessment of 
corporate property or the determination of the amount of tax 
due from certain corporations. 

II. Those that have not only the duties of the first class to 
discharge but in addition are required in some degree to equalize 
assessments in general. 



PROBLEMS OF TAX ADMINISTRATION 541 

III. Those that perform not only the same duties th^t are im- 
posed upon members of classes I and II, but are required also to 
exercise a directory or supervisory control of the work of local 
assessors. 

Class III is under consideration in the preparation of this 
paper, and its members may be generally designated as "perma- 
nent tax commissions," 

Among the individuals of the class, centralization is more or 
less differentiated. The Indiana commission was the first body 
to be granted what may be called extraordinary powers, and as 
the other states have since created similar commissions in rapid 
succession, the policy has been to give added powers until in 
a few jurisdictions the commissions have practically all the au- 
thority that is needed. 

As the benefits of centralization have been perceived there have 
resulted also increased powers to the earlier created bodies. The 
only thing which tends to check the movement towards centrali- 
zation is the separation of the sources of state and local revenue. 
In states where this system has been provided, the tendency is 
naturally away from centralization except as to the assessment of 
property which provides the state with revenue. 

States which have members of class III appear in the table 
on page 542 in chronological order of creation, as near as 
could be ascertained ; and also there are given the dates when 
the commissions were organized, so far as such information is 
available. 

In Wisconsin an income tax has largely replaced the personal 
property tax, and the tax commission appoints all assessors of 
incomes. In Ohio, deputy state tax commissioners are appointed 
by the governor, and are subject to removal by the tax com- 
mission with the consent of the governor. Deputy assessors 
are appointed by the deputy state tax commissioners, but all 
are under the absolute control of the tax commission. The Ohio 
commission is among the latest creations, and as the result of the 
benefits of centralization observed in other states has been as- 
signed nearly all the powers that have been devised to give full 
centralized control of assessments. 

In a few other states the commissions have power to appoint 
assessors, but this ideal power has not yet been extensively 
bestowed. Efficiency in this branch of the public service will 



542 SELECTED READINGS IN PUBLIC FINANCE 



States 



Maine . . . . 
Massachusetts . 
Indiana . . . 
New York . . 
Michigan . . . 
Wisconsin . . 
Connecticut . . 
North Carohna 
West Virginia . 
New Jersey . . 
Texas .... 
Washington . . 
Alabama . . . 
Kansas .... 
Minnesota . • . 
Arkansas . . . 
Oregon .... 
Wyoming . . . 

Ohio 

New Hampshire 
North Dakota . 
Colorado . . . 
Rhode Island . 
Arizona . . . 
Georgia . . . 
Maryland . . . 
Nevada . . . 
Montana . . . 
South Dakota . 
Idaho .... 
Florida .... 
Vermont . . . 



Date 


OF Law 


Date of 








Organization 


March 


26, 


1891 
1891 
1891 
1896 
1899 




1891 
1891 
1891 
1896 
1899 


April 


19' 


1899 


June 


7, 1899 






1901 


July 


I, 1901 






1901 




1901 


Aug. 


ii> 


1904 


Nov. 


28, 1904 


March 


29, 


1905 


April 


3' 1905 


April 


17' 


1905 
1905 
1907 


Aug. 


13' 1905 
1905 
1907 


March 


7' 


1907 


July 


I, 1907 


April 


25' 


1907 


April 


27, 1907 


May 


12, 


1909 
1909 
1909 


May 


18, 1909 
1909 
1909 


May 


ID, 


1910 


July 


I, 1910 


April 


15' 


1911 


May 


I, 1911 






1911 


July 


I, 1912 


June 


2, 


1911 


May 


20, 1912 


Feb. 


i,S. 


1912 


Feb. 


20, 1912 


May 


12, 


1912 
1913 
1913 
1913 


May 


18, 1912 
1913 
1913 
1913 


Feb. 




1913 


April 


i'i9i3 


Feb. 


13' 


1913 


Feb. 


26, 1913 


March 


13' 


1913 


May 


13. 1913 


June 


7' 


1913 


July 


10, 1913 


no date 


I 




no data 



certainly be sooner realized under an appointive assessor system 
than where such officers are elective. Under the first plan they 
can be chosen because of their qualifications and can be retained 
so long as they efficiently and honestly serve the public. Under 
the elective system the choice is a sort of "hit or miss" selection. 
Rarely will a qualified officer be chosen in this way. As a rule 
qualifications for special work receive little consideration at the 
polls. 



PROBLEMS OF TAX ADMINISTRATION 543 

In conclusion some of the results of the work of commissions 
are as follows : 

Arizona: Organized 19 12, but three weeks thereafter the assessment 
rolls were closed and but httle could be done that year. The commission 
rewrote the entire revenue laws of the state and removed inequalities. 
The bills prepared became laws. An investigation showed that there was 
great inequahty in the distribution of the tax burden, and resulting action 
increased the revenue from mines from 19 per cent of the total tax pre- 
vious to the organization of the commission to 37iV P^i" cent of the total 
tax in the first full year of the commission's work, and the revenue from 
railroads from 12 per cent of the total to 221% per cent. 

A careful system of checking in regard to stock shipments resulted in a 
large number of animals being placed upon the roll that had previously 
escaped taxation. Pursuant to a law written by the commission and en- 
acted by the legislature, the state revenue will be increased in 19 14 
to the amount of $18,000 from a source never before taxed, i.e., the 
property of private car companies. A careful equalization of all prop- 
erty in the state has already brought about a more equitable distribu- 
tion of the tax burden. In 191 1 the total taxable valuation of the state 
was $98,000,000, and through the work of the commission the total in 
19 14 will approximate $408,000,000. 

Arkansas: The endeavor of the commission has been to have the 
property in the state assessed at approximately 50 per cent of its full 
value. An investigation caused the commission to conclude that the 
property of utilities, the assessment of which was to be made by the 
commission, had previously been assessed at about 30 per cent of its 
value ; by the assessment of the commission it is now valued at from 
45 per cent to 50 per cent of full value. In 1908 it was assessed at 
$51,000,000, and the latest assessment by the commission was a little 
over $90,000,000. 

In hke manner the commission raised the valuation of telephone and 
pipe line companies from 20 per cent of full value to 50 per cent of the 
same. The original assessment at a million dollars has been increased to 
three million. Other pubHc-service corporations which were in 1908 as- 
sessed at two milHons were in 19 13 assessed at something in excess 
of six millions of dollars. All property now assessed by the commission 
was valued in 1908 at $55,000,000; the commission value in 1914 is a 
little in excess of $102,000,000. The result is more real equality in 
the distribution of the tax burden. 

This commission lacks power of equahzing assessments between in- 
dividual taxpayers, and as the variation from true value is all the way 



544 SELECTED READINGS IN PUBLIC FINANCE 

from 5 per cent to loo per cent great inequality exists which the com- 
mission cannot as yet remedy, though it is looking for a more elastic and 
equitable law at the hands of the legislature which will permit the re- 
moval of the inequahties now existing. The commission administers 
the corporation franchise tax. The commission drafted and submitted to 
the legislature in 191 1 a law providing a franchise tax to be paid by 
corporations on that part of their capital stock employed in Arkansas. 
The tax is jj of one per cent. Under the old law the revenue from this 
tax was about $65,000 ; under the new law the amount received is $180,000. 

Colorado: Through the work of this commission for the first time in 
the history of Colorado the law has been enforced which requires prop- 
erty to be assessed at full value. Correspondingly, the tax rate has been 
reduced from over 40 mills to i3iV(y^-il^s. In 19 13 for the first time 
there was something like a fair equalization of value among the sixty- 
three counties. Under the supervision of the commission the county 
assessors have made a more full and complete listing and valuation of 
local property. As the result of the work of the commission, cooperating 
with county assessors and county boards of equalization, the tax burden 
is more equitably distributed among the different classes of property than 
ever before. 

An instance of an equitable shifting of the tax burden is the following : 
agricultural lands and improvements have been increased nearly $50,- 
000,000 ; metalliferous mining property has been increased $28,000,000, 
while town and city lots and improvements have been reduced $65,000,- 
000. Local pubhc utilities formerly assessed by county assessors at 
$16,000,000 in round figures were assessed by the commission in 19 14 
at $68,000,000. The larger public-service corporations, such as rail- 
roads, etc., under the old law were assessed at approximately $60,000,000, 
and for the year 19 14 by the commission at $195,000,000. 

Before the creation of the commission the tendency on the part of the 
county assessors was to so act in assessing as to shirk the state tax, there 
being a great rivalry among the county assessors in this particular, and 
as a result the state had become practically bankrupt. The constitutional 
limit of state tax is four mills, and as the result of the commission's efforts 
the rate is now only one and three-tenths mills. The effect is to put the 
state upon a sound financial basis. 

The commission has drafted and secured the enactment of several ef- 
fective revenue measures. There has been a general toning up in the 
administration of the assessment laws and in the collection of taxes. 

Connecticut : In this state there is only one officer, the tax commis- 
sioner, who first took office July i, 1901. In this state there is separa- 
tion of the sources of state and local revenue. Under the administration 



PROBLEMS OF TAX ADMINISTRATION 545 

of the commissioner the assessment of buildings and land has been 
separated. Pursuant to his recommendation the terms of offices of the 
assessors have been lengthened to three and four years, thus giving the 
municipahties the benefit of experienced assessors. The educative work 
performed by the commissioner has produced meetings of assessors, 
boards of revenue and tax collectors, at which meetings the la,ws in rela- 
tion to the duties of each of these classes of officers and methods of ad- 
ministration have been discussed, and the result is that now there are 
two associations of tax officials which hold annual meetings and have 
definite programs of speakers. The whole result is educational and is 
causing the public to take notice of tax matters. 

Pursuant to the recommendations of the commissioner, there have been 
a number of changes in the tax laws of the state whereby the public in- 
terest has been promoted. The law in relation to the taxation of forest 
lands now provides a nominal tax on the value of the land during the 
period of growth, and a yield tax at the time the timber is cut. Pursuant 
to the recommendations of a special commission, of which the commis- 
sioner was a member, the legislature has changed the law in relation 
to the assessment of telephone and telegraph companies. The former sys- 
tem of taxing physical properties of the kind has been replaced by a 
gross earnings tax which yields a larger revenue to the state without 
unjustly burdening the companies. Another change in the law has abol- 
ished the taxation of inheritances of non-resident decedents so far as 
personal property is concerned. 

This commissioner, in so far as his authority extends, has been intelH- 
gently active with the result that in many ways the pubhc has been 
benefited. 

Florida : This commission is new, the date of organization being July 
10, 1913. As yet it has had little opportunity to produce results. The 
aim of the commission is to get all property in the state assessed upon a 
basis of full cash value as the law requires, but it has found that such 
result will be inexpedient for the present year, 19 14, and is operating 
with the fifty county assessors of the state to get all property assessed 
upon a basis of 50 per cent of actual value. In succeeding years full value 
will be the aim. Upon the 50 per cent basis of value the aggregate 
assessment has been increased from $234,000,000 in the previous year to 
$295,000,000 in 1914 ; and correspondingly the state tax levy has been 
reduced from 7^ mills to 5^ mills. Some effort has been made to 
equalize values of property among counties and also in some instances the 
property of a particular kind in single counties. The educational effect 
of the commission's work is apparent in the fact that the public begins to 
reahze the im^portance and necessity of a centrahzed assessment. 



546 SELECTED READINGS IN PUBLIC FINANCE 

Idaho : This is also a new commission, its organization having been 
made on May 13, 1913. Consequently, it has had but Uttle time within 
which to produce results. Among the achievements is an estimated 
amount of $150,000 in taxes saved through the enforcement of the law 
regarding the collection of unsecured personal property taxes at the 
time of assessment. The assessment of public utihties after a careful 
investigation has been increased several millions of dollars for the purpose 
of more equally distributing the burden of taxation among the different 
property owners. A vigorous enforcement of the inheritance-tax law has 
resulted in the collection of a considerable amount of delinquent inherit- 
ance or transfer taxes. 

Kansas: The first assessment of all property in the state under the 
control of the commission was in 1908. Total assessment, $2,451,560,397. 
The total assessment of the previous year under the old plan, $425,281,214. 
Average rate of levy for all purposes in the state, 1907, .0469638 ; average 
rate of levy for all purposes in the state, 1908, .0086548. Average 
state levy, 1907, old plan, .006 ; average state levy, 1908, .0009. The 
sixth assessment under the control of the commission produced an ag- 
gregate of $2,809,801,434, and average rates for state, .0012 ; for all 
purposes, .01048995. The rates, it will be observed, have not been corre- 
spondingly reduced with the increase in valuation, but this is accounted 
for by the fact that pubHc expenditures in 19 13 exceeded those of 1907 by 
the sum of $8,985,780. In the assessment under the new plan, property 
has been brought practically to actual value, and the increase in various 
kinds of property ranges from 300 per cent to 1000 per cent. Thus 
property is brought upon an equal plane of assessment. 

One important result under the new plan is that the practice of under- 
assessing valuable properties relatively with less desirable and less valu- 
able properties has been to a great extent eliminated. The educational 
work of the commission with the local officers has elevated the standard 
of work and has substituted for a desire under the old plan to under- 
assess, an earnest effort to actually assess property at its full value. 

Another result has been to get upon the tax roll personal property in 
excess of $300,000,000 never before taxed. 

At the instance of the commission many important amendments have 
been made to the statutes tending to cause a more equal distribution of the 
tax burden. 

The commission drafted a legacies and successions tax bill, and secured 
its enactment in 1909, the provisions of which administered by the com- 
mission brought to the general revenue of the state approximately $200,- 
000 per annum. This law after four years of successful operation was in 
1913, as the result of partisan politics, repealed absolutely. 



PROBLEMS OF TAX ADMINISTRATION 547 

A law written by the commission and enacted by the legislature doubled 
the revenue derived from express companies. 

Another law proposed by the commission more than doubled the 
revenue received from private car companies. 

All increases in revenue produced through the work of the commission 
tend only to equalize the distribution of the tax, and do not unjustly 
burden the sources of the revenue. The commission has large powers, 
but has refrained from exercising extreme power except in a few cases 
of emergency. Its power to remove assessors has only once been exer- 
cised and that indirectly by suggesting a resignation ; it has several 
times approved the removal of deputy assessors by^ the county assessor. 
The power to reassess districts has been exercised several times, always 
with good results. In such cases the assessors are appointed by the 
commission. 

Massachusetts : In this state there is only one officer possessing the 
central authority, the tax commissioner. The department was created in 
1 89 1, and since that time there have been but two incumbents of the 
office. The term of the first commissioner expired by reason of his death 
in 1899, and the present commissioner has since been in office. 

Under this commissioner the taxation of corporations has been made 
uniform so far as the laws are uniform. The revenue of the common- 
wealth has been increased. Local assessments have been considerably 
equalized and the procedure of local boards has been made uniform. The 
administration of the inheritance-tax law has been made even and search- 
ing. The chief reason probably for the good which this commissioner 
has been able to accomphsh has been his freedom from molestation on 
account of partisan politics. 

Michigan : The chief benefit from the work of this commission has been 
in placing upon the assessment rolls a large amount of property which had 
formerly entirely escaped taxation, and, by the exercise of its powers of 
review of assessments, the correction of innumerable inequalities in in- 
dividual assessments. During the past three years twenty counties have 
been completely reassessed by the commission and property placed upon 
the rolls at its true cash value as required by the constitution and the 
laws of the state. This procedure was made necessary by the manifest 
inequahties between individual assessments resulting from the ineffi- 
ciency of local workers. The commission instituted probably the first 
searching investigation as to the proper basis for the assessment of the 
property of transportation companies. 

Minnesota: The work of this commission has been very effective and 
has resulted in the following benefits to the pubHc. 

A classified assessment law by means of which in the year 19 14 there 



548 SELECTED READINGS IN PUBLIC FINANCE 

is the first full and fair assessment of property that has been made in the 
state in fifty years. 

A complete system of assessing mines and mineral property which in 
operation has increased, through the work of the commission, the valuation 
of such property from $64,ocx5,ooo in round numbers to $260,000,000. 

An increase in the gross earnings tax on railroads from 4 per cent to 
5 per cent, the net increased revenue from such property being 25 per 
cent. 

The enactment of a comprehensive and very satisfactory graduated and 
progressive inheritance-tax law, yielding large sums to the state. 

Upon the recommendation of the commission the legislature enacted a 
three-mill ''money and credits " tax law, as the result of which the revenue 
from such property has been very materially increased. 

Also it has caused the enactment of 5 per cent gross earnings tax on 
sleeping-car companies, as the result of which the revenue from such 
companies has been doubled in two years. 

Has recommended and procured the passage of a very satisfactory 
mortgage registry tax law. 

It will be observed that this commission has accomplished a great deal. 
It is in the front rank of working commissions. 

Montana: Organized April i, 1913, so that there has been but little 
time for results. The powers of this commission are advisory only, 
but the commission has already done some effective work towards the 
removal of inequahties in assessments. Much property previously 
under-assessed has been brought nearer to equality with other property. 
Has procured the assessment, as property, of reserved mineral rights. 
Has studied the systems and laws of other states carefully and will 
recommend constitutional changes permitting classification and effective 
equalization. 

New Hampshire: Organized May i, 191 1. Through the work of this 
commission many property units, corporations, etc., have been increased 
in valuation for tax purposes from 100 per cent to 300 per cent. Property 
valuations as a whole have been increased nearly 50 per cent ; the tax 
rate has been lowered ; the general equalization of assessments has 
brought all property in the state to the basis of actual value. 

New Jersey : The board of equaHzation of taxes is the name of this 
board, and in 1905 it succeeded the state board of taxation, which had 
been in existence since 1891. The board is an appellate board and grants 
remedies to appellants from the action of the local authorities, and has 
done much of this kind of work. Equalization of all property in the 
state through cooperation with local authorities has been one of the 
principal results. 



PROBLEMS OF TAX ADMINISTRATION 549 

New York : This commission dates from 1896. Particular attention 
has been given to the enforcement of the special franchise tax law, and 
the assessment of property thereunder, and to the organization of local 
assessors, and extending aid to them in order to place upon the assess- 
ment rolls all taxable personal property; and also to obtain a more 
equitable and just assessment of real property and a just and equitable 
equahzation of assessment among the towns and counties of the state. 
Numerous achievements have resulted, enumeration of which is prevented 
by lack of space. 

North Dakota: This commission is new, dating only from July i, 1912, 
but has been busily at work and the results are indicative of increased 
results as the work of the commission progresses. The getting upon the 
assessment rolls of much property which escaped before the organization 
of the commission has had attention, and two items of about sixteen 
milHons each of such escaped property were added, and besides these two 
items eight or nine millions of similar items. The revenue derived from 
this heretofore omitted property is estimated at $500,000. The laws of 
this state do not permit the assessment of property at full value, and an 
attempt to get the law amended in that particular failed because of the 
veto of the governor. At the instance of the commission the legislature 
passed an inheritance-tax law which is being administered by the com- 
mission. This commission has been very busy with the multitude of 
duties which necessarily come up in administering tax laws, through 
hearings, investigations, etc. The duty of equahzation is placed else- 
where, but the commission makes recommendations to the state board 
of equalization. 

It is impossible to detail briefly all the accomplishments of an active 
commission, and this one shows activity, and when it has a Httle longer 
life will undoubtedly have accompHshed much for the public benefit. 

South Dakota: This is one of the newest commissions, having been 
organized in 19 13. The results of its work are : 

(i) An educational movement which is causing people to take active 
and intelligent interest in matters of taxation. 

(2) Assessed valuations have been brought up from 25 per cent or less 
to approximately full value as required by the constitution. 

(3) Better equalization from townships to state as a whole, due to 
equahzation according to schedule of valuations for all classes of 
property. 

(4) The commission has recommended the codification of revenue 
laws, including county assessor plan, and will also recommend submis- 
sion of six constitutional amendments to be voted upon in 19 16. 

For a new commission it seems to have been busy. 



5 so SELECTED READINGS IN PUBLIC FINANCE 

Ohio: Since the organization of this commission in 1910 its accom- 

pHshments have been many, too numerous for detailed mention. The 

most saHent thing is the increase in property valuations. Data for 1910 

before, and for 19 13 after, the commission commenced its work given 

below indicate the increase : 

1910 1913 

Value of realty $1,656,944,631 $4,418,953,299 

Value of personalty 827,370,943 2,300,115,670 

Rhode Island: The work of this commission dates from February 20, 
191 2. A valuable educational movement was started by the commission 
in the organization of a state tax officials' association which meets twice a 
year. The quite apparent results are a more thorough understanding of tax 
laws and better assessments and valuations. In many other ways the 
commission seeks to advise the pubHc upon matters of taxation. Large 
amounts of intangible property which always escaped taxation, through 
the efforts of the commission are now bearing a share of the tax burden. 
Relatively, the tax burden is much more equal than under the old system. 
Tax hsts have been standardized and also the call for financial town 
meetings and the votes by which the levy is made. Like all active com- 
missions it is doing much good which cannot be stated in detail. 

Texas: This commission has slight control over local assessing offi- 
cers as its power is only advisory. Its accomplishment has been chiefly in 
getting upon the tax roll the intangible assets of corporations through its 
own direct valuations and through cooperation with local valuators of 
property. 

Wisconsin : No commission has been more active or has accomplished 
more than the Wisconsin commission, which was the first commission to 
be given the extraordinary powers before mentioned ; in fact, the law of 
Wisconsin and the work of its commission have been a guide in the refor- 
mation pf tax systems in other states. It has been able to accomplish 
more than most other commissions because the legislature of Wisconsin 
has been hberal in its appropriations, and has given the commission facili- 
ties for the gathering of statistical data and expert study of all ques- 
tions concerning taxation, which privilege has been denied to most other 
states. It is difficult to briefly summarize the work of the commission, 
but some of its work and recommendations are as follows: 

A change from the gross receipts tax upon railroads to the assessment 
of railroad property on the ad valorem basis, with the apphcation of the 
average rate of the general property of the state. An exhaustive investiga- 
tion into the value of this class of property was made. Later the 
ad valorem system was extended to the property of street railway and 
telegraph companies. 



PROBLEMS OF TAX ADMINISTRATION 551 

Pursuant to the recommendation of the commission many beneficial 
changes in the tax laws have been made by the legislature, and among 
other enactments have been laws providing for tax on inheritances and an 
income tax, both of which laws are administered by the commission. 

Wisconsin has pioneered the way in many reforms, but the most dis- 
tinctive perhaps is the replacement of a large part of personal-property 
taxation by an income tax. This law is the first of its kind in the central 
western states, and is enforced by the commission in a manner never 
equaled before in the United States in the enforcement of income-tax 
laws, which laws exist in several of the eastern states. 

The brevity required here does not permit even a mention of many other 
accomphshments by this commission. 

West Virginia: In this state there is no board, only a single officer 
whose commission was first issued November 28, 1904. The things 
accomphshed are : 

(i) The assessment of property at a more uniform value. 

(2) A reduction in the tax rate of more than 50 per cent. 

(3) The installation of a uniform system of accounting of pubhc funds, 
which has saved to the communities hundreds of thousands of dollars. 

(4) Has secured a more vigorous enforcement of the laws relating to 
license taxes, with the consequence that they are paid more promptly, 
and practically everybody who is required under the law to pay such 
taxes now responds. Under the old system many persons escaped the 
payment of license taxes. 

This commissioner enjoys the unique, distinction of being also the 
commissioner of prohibition, and is charged with the enforcement of 
the prohibitory laws of the state. 

The results above set forth indicate that the modern commis- 
sions w^hich have pov^er at all approaching their needs are busy 
and active bodies. Other states not included might be in the 
same class, but data for inclusion 'were not available. One 
noticeable trend in the v^ork of the commissions is to increase 
the taxes of corporations and thereby to benefit other property. 
This inclination should not become effective except in cases 
v^^here the burden of the tax has been relatively lighter upon the 
property of corporations than upon other property. The taxes 
of corporations should not be increased for political reasons, 
and always in adjusting taxes the probable incidence of the tax 
should have consideration. The consumers of a product, whether 
it be transportation, transmission, or otherwise, will probably 



552 SELECTED READINGS IN PUBLIC FINANCE 

in the end bear a considerable part of the tax advanced by the 
corporation, and the question whether special classes of con- 
sumers should be taxed for the benefit of the public will bear 
argument. 

It would seem that this article would be incomplete without at 
least a brief reference to the work of the National Tax Associa- 
tion. The national tax conferences held annually under the aus- 
pices of the association have brought together scholars, experts, 
legislators and practical administrators of tax laws upon a com- 
mon platform for the interchange of views, and the result has 
been a wonderful progress toward tax reform throughout the 
whole country. Congressional legislation has in some instances 
been molded through the direct work of the association or of 
its members. Constitutions in states have been amended as the 
result of the educational work of the association so that hard-and- 
fast rules which have not permitted a relatively equal distri- 
bution of the tax burden have been removed. 

Uniformity among the states as regards tax legislation is very 
desirable, and the association is pioneering the movement, and 
it is reasonable to expect that the laws of the states will ulti- 
mately be molded so as to eliminate to a large extent the un- 
satisfactory double taxation that is now prevalent because of 
conflicting state laws. 

60. The Administration of Laws for the Taxation of Property: 
Report of a Committee of the National Tax Association.^ — 

This committee was appointed pursuant to the following reso- 
lution adopted at the last conference : 

'^^ Resolved: That this conference recommend to the National Tax 
Association that the association appoint a committee to investigate the 
methods of administering laws relating to the taxation of property in the 
several states and provinces and prepare a report for the information of 
future conferences." 

The text of this resolution excludes the subject of excise or 
privilege taxes such as those upon corporate franchises, inherit- 
ance taxes, and similar forms of revenue usually employed for 
state purposes and collected by a central authority. Nor do the 

1 Reprinted from the Proceedings of the National Tax Association^^ o\N ^ pp. 363-376. 



PROBLEMS OF TAX ADMINISTRATION 553 

methods of administering the laws for these special forms of 
taxes present a serious problem at this time. Whatever diffi- 
culties may arise under them seem to be easy of solution by the 
particular state imposing the tax. Moreover, such taxes form a 
small portion of the total revenues, and the method of collecting 
them affects directly a very small part of the population. 

Existing Conditions 

The general property tax supplies more than 80 per cent of 
local revenues in the United States and more than 75 per cent 
of the total of state and local revenues. The property assessed 
for this tax was valued, according to the last available census 
figures (1902), at more than thirty-five billion dollars. The 
total taxes collected from this assessment were then over seven 
hundred millions of dollars annually, and the annual sum has, 
without doubt, increased considerably since the last figures were 
compiled. The equitable valuation of this enormous amount of 
property, so that this great tax burden of hundreds of millions of 
dollars shall be fairly distributed among those liable to the tax, 
is a problem which increases in gravity with the increases of tax 
rates and in property values. It is this general property tax and 
the methods of its administration which your committee will 
consider. 

The administration of the general-property-tax law in any state 
or under any statute is in three parts : the actual assessment made 
in the first instance by a local assessor; second, the review of 
the assessment and correction of errors by supervising or re- 
viewing boards ; and, finally, the announcement of the results 
for information of the taxpayers and for study and comparison. 

All three stages of administration have provided .fruitful 
sources of complaint and have been denounced with equal ve- 
hemence and perhaps with equal justification. But suggestions 
for reform in administration have concerned themselves chiefly 
with improvements in the re view" and correction of errors. The 
changes made in the states where most has been done to improve 
assessment methods, as in Kansas, Minnesota, and Wisconsin, 
have been in the main along the lines of either relieving indi- 
vidual and complaining taxpayers or of so-called equalization 
between entire districts or counties. Little chans^e has been made 



554 SELECTED READINGS IN PUBLIC FINANCE 

anywhere In the preliminary field work or in the method of pri- 
mary assessment by the local assessor. 

We have built from the top down in the effort to improve the 
system. It is time that the foundations should be considered 
and that the local assessment work should be improved. 

I . The Local Assessor 

The usual method throughout the United States (with a few 
exceptions) of administering the general property tax is to 
divide the state into tax districts, usually comprising a city, vil- 
lage, or township; in some cases a county. The people of the 
tax district choose, usually by election and for a short term, the 
assessor. He is not required or expected to give much time to 
his work, and, in most cases, he is paid a ridiculously small sum 
per day and limited to a few days' work in the year. Even when 
his district is large, as in the case of a county assessor, or where 
it has high values, as in a city, it is seldom that the assessor is 
chosen because of special knowledge or study of assessment 
work, or that he is paid a sufficient salary or given a sufficiently 
long tenure to justify him in making a special study of this 
work. It is the duty of this assessor to value the real estate 
within his district, and (according to the law of his state in 
regard to its situs) to value either such tangible personal prop- 
erty as he finds within his district, or, more usually, td assess 
each inhabitant thereof for all the personal property that he 
may own wherever located. 

These property valuations are made in accordance with the 
judgment of the assessor as to the actual values of the property 
with which he deals. When he has completed these valuations, 
he places them upon an assessment roll and, unless corrected, 
the taxes required for the purposes of that district, and those 
required from it for county or state purposes, will be appor- 
tioned among the inhabitants or the owners of property therein 
in such proportion as the relation which the valuations made 
by the assessor bear to each other. 

Thus, in the first instance, this local assessor has the responsi- 
bility, and performs the work, of distributing among the inhabit- 
ants or property owners of his district, in accordance with his 
judgment of values, a tax burden which represents over three 



PROBLEMS OF TAX ADMINISTRATION 555 

quarters of the contributions of the people for all public pur- 
poses, and which in the total aggregates over seven hundred 
million dollars. 

This method of local assessment, as generally administered 
throughout the United States, is practically unchanged since 
colonial days. When property values were low and the total tax 
burden was light, and the residents of a tax district knew each 
other's circumstances and were known also to the assessor, this 
system no doubt resulted in a reasonably fair distribution of the 
tax burden. 

But these conditions have changed in all respects. Property 
is increasing both in quantity and in value. Where formerly, 
over large areas, land was of equal value per acre, it now varies 
even in rural communities, through the increased demand for 
the better land and the growth and location of transportation 
facilities. Many districts formerly entirely rural now contain 
villages or border upon a city, while values in cities are measured 
by feet and inches and reach almost incredible amounts. Im- 
provements on land are increasing in value and diversity. In 
the majority of tax districts the assessment of ordinary real 
estate presents many difficulties. The development of modern 
industry and the building of huge factory plants with compli- 
cated machinery, the development of railroads and other trans- 
portation lines and of local public-service corporations have 
resulted in the creation of a class of property whose value can 
only be estimated by those specially familiar with it. And yet 
the ordinary local assessor is expected to proceed unaided, with- 
out instruction and without experience, to properly apportion 
the burden of taxation. 

In the matter of personal-property assessments the condition 
is far worse. In most states the law requires an assessment of 
each inhabitant of the tax district on the value of all of his 
personal property, except certain tangible property which may 
be permanently outside the state. This local assessment of 
personal property has broken down completely under modern 
conditions, and the causes of the failure have been set forth by 
the committee which reported to the last conference on this 
subject. In practice the local assessment of personal property 
is too often the result either of the mere estimate of the assessor 
as to how much each person will stand without too vigorous a 



556 SELECTED READINGS IN PUBLIC FINANCE 

protest, or of a positive bargain with individual citizens re- 
garding the amount they are wiUing to pay. 

2. Board of Review and Eqitalization 

Protection against unjust or arbitrary assessment by the local 
assessor has been attempted by the establishment of boards of 
review or of equalization. 

The function of boards of equalization is generally to attempt 
to secure some fairer distribution of the taxes imposed by one 
district upon other districts than would be obtained if those 
taxes were placed entirely upon the valuations made by the 
local assessor. The oldest form of equalization is probably that 
made by a state board for the purpose of distributing the burden 
of a tax for state purposes among the local districts. This is 
done by arbitrarily changing the entire value placed upon the 
property in a county by its local assessors. Similarly county 
equalization exists in various forms whereby the total valuation 
of a tax district is arbitrarily changed so as to make a different 
distribution of the county tax between the districts comprising 
the county. 

Neither of these methods touches the inequalities between 
individual taxpayers of any one district. To correct those in- 
equalities boards of review have been established in some 
localities to hear appeals of individuals from the valuations 
made by the local assessor and to grant reductions if thought 
proper. These boards of review present as great a variety of 
organization and powers as do the local assessors themselves in 
the methods of appointment or election, jurisdiction, and powers 
as applied to the local assessors. 

One idea, however, runs through them all, namely, that on 
the complaint of the aggrieved taxpayer or on the wider knowl- 
edge of the actual facts possessed by the members of the board 
of review, the actual assessments made by the local assessor shall 
be adjusted, either accurately or roughly in the mass, so as to 
provide a nearer approach to equality of burden among the tax- 
payers. Obviously such boards of review can deal only with a 
comparatively few cases or else they would really be making a 
new assessment. The vast majority of taxpayers must of neces- 
sity pay without alteration whatever share of the tax burden 



PROBLEMS OF TAX ADMINISTRATION 557 

may be placed upon them through the valuations made by the 
local assessor. It is only in extreme cases of individual injustice 
that appeals are profitable. Most people have not the time, or 
the means, or the inclination to do more than complain to the 
local assessor himself. And even if individual complaints to 
him, or appeals to boards of review, or to the courts give a 
specific relief to the individual, they will have little or no 
effect upon such maladjustment of the tax burden as may 
exist through unequal valuations of the property of those who 
do not appeal. 

There are, as a rule, three boards of review (though not 
always called by this name) : the local board organized in the 
territorial area covered by the local assessor ; the county board, 
A\'hose jurisdiction covers the county and which is intended to 
preserve equality between the units making up the county ; and 
the state board, acting in a similar capacity for the whole state 
and dealing with the counties as units. 

The usual method is to have the local board of review com- 
posed of the local assessors when there is more than one assessor. 
Yhis, of course, has the obvious disadvantage of making them 
judges of their own work. When there is only one local assessor, 
it is customary to join with him in the local board of review 
some other local officials. This in its turn has the obvious dis- 
advantages of placing men on the local board of review who 
have made no special study of values, and also of introducing 
into such board the men who are most likely to be influenced by 
considerations of the effect of their action on their own election 
or their own line of work. As a result, of all the boards of re- 
view established by law, the local board of review has generally 
proved to be the most unsatisfactory and has done the least to 
accomplish the object of its establishment. 

The county board of review, in like manner, has usually been 
composed of men elected or appointed for other purposes and 
who have had imposed upon them this duty of equalization 
and review of assessment simply because such duty has to be 
imposed on somebody and the group selected seemed to be the 
least objectionable for that purpose. It is difficult to see how 
it was ever possible to assume that the important work of 
equalizing tax burdens could be satisfactorily performed by men 
unfamiliar with the work of assessment, and whose only reason 



558 SELECTED READINGS IN PUBLIC FINANCE 

for approaching the work was simply compliance with the 
mandatory provisions of a statute which required them at stated 
periods to perform a stated act. The performance of this duty, 
from the very outset, degenerated into a perfunctory compliance 
with the letter, rather than the spirit, of the statute, or if that 
were not the case, into an attempt to twist compliance with the 
vague terms of the statute into partisan political advantage. 

The State Board of Equalization, the final board of review, 
has not proved much more satisfactory, because it is usually 
made up in much the same manner as the county board. The 
only thing that has given it and its work any greater respect is 
the fact that the board being further removed from the actual 
assessments has been freer from the personal influences which 
tend to warp the judgment and the action of the local boards 
and the county boards. 

3. Publicity of Assessments 

As a general rule, there is almost no attempt to advise the 
taxpayer of the assessment that is about to be made against him* 
or against his property. And in like manner there is practically 
no attempt made to provide him with any means of studying 
and comparing the results of the assessments that have been 
made. 

Everywhere the law assumes that the individual taxpayer is 
familiar v/ith assessment laws, that he has constantly before 
his mind the dates involved in assessment work, that he knows 
the local assessors, and that when the books are opened for in- 
spection, he and all his neighbors will flock to examine, study, 
and compare the results. This, of course, in the present day and 
generation, whatever it may have been in past time, is a wild 
assumption and is everywhere at variance with actual facts. 
Hence we have the intense annoyance and feeling of rankling 
injustice on the part of the taxpayer; hence the abuse of the 
assessor and his work and the antagonism which he meets when 
he should have assistance. Hence also comes the feeling, which 
is so prevalent, that taxation is a hopeless muddle, that nothing 
can be done to improve it, and that it is one of the necessary evils 
of civilization which must be endured or evaded by any means, 
good, bad, or indifferent. 



PROBLEMS OF TAX ADMINISTRATION 559 

Suggestions for Improved Administration 

This can be but a preliminary report. The subject is too vast 
to admit of more than a few tentative suggestions in such a 
report as this. Your committee, however, offers the following 
for consideration : 

I . As to the Local Assessor 

In the first place, the local assessor must be relieved from 
the assessment of those classes of property which require ex- 
pert knowledge not possessed by most citizens. This has been 
done in some states where railroads and similar public-service- 
corporation property is assessed by a State Board, which can 
employ engineers or others familiar with that class of property, 
and is also better able to discover and assess those intangible 
or franchise values which do not attach to any part of the 
physical property, but add to the value of such property con- 
sidered as a whole. Where it is not practicable to have such 
property assessed by a central board, provision should be made 
for supplying td local assessors data by which an estimate may 
be made of values of unusual classes of property, such as mineral 
lands or quarries. 

Your committee will not enter into details in regard to methods of 
making local assessments. In the matter of real estate, another 
committee of this conference reported last year on the subject of 
uniform classification of real estate, and was continued for the 
purpose of preparing suggestions for local assessment work. 

In the matter of methods of personal-property assessment, 
the local assessor should be relieved of the assessment of per- 
sonal property or, at least, from the assessment of all except 
such as he can readily find and value. It is admitted by all 
investigators of the subject that local assessment of personal 
property cannot be made successfully. It is not within the prov- 
ince of this committee to express an opinion as to the proper 
method of taxing and assessing this class of property. Another 
committee is now investigating the questions of substitutes for 
the personal-property tax. But we must point out the imprac- 
ticability of improving the methods of local administration so 
long as this property is assessed under the general property- 
tax system. 



S6o SELECTED READINGS IN PUBLIC FINANCE 

In the second place, the position of an assessor should be 
dignified by a sufficient tenure and salary to justify him in giving 
full and complete service. It is not to be expected that an 
assessor who is paid $1.50 or $2 a day and limited to perhaps 
sixty days as a maximum, which is the custom in some states, 
will give the subject of valuations and methods his entire time 
and attention. It is true that tax districts are frequently so small 
that they do not warrant a large increase in salary, nor would 
they require much more time for a proper assessment than the 
assessor now gives. In these cases such districts should be con- 
solidated where practicable so that they will be sufficiently large 
in area and valuations to justify the employment of all the time 
of a competent assessor. 

Where practicable, better results no doubt could be secured 
if local assessors were appointed with either a permanent tenure 
or a longer term than is usual under the elective system. This 
is done in a number of cities where a board or commissioner, 
either elected or appointed, is at the head of a tax department, 
but the actual work is performed by subordinates who give their 
entire time to work and whose tenure is secured by civil-service 
regulations. 

Where it is not practicable to secure either the consolidation 
of districts or the appointment of assessors, the locally elected 
assessor should be paid an adequate salary for the work which 
he is expected to perform instead of the ridiculous sum so fre- 
quently given. And he should also have the fullest possible assist- 
ance from a central board or commission, either directly from 
the board or, in states which have township assessments, through 
the intermediary of a county supervisor of assessments. 

In those states where the assessment district is a county, the 
area is usually sufficient to employ the assessor for all his time 
and, in a number of cases, requires that he shall have assistants. 
But this system exists in comparatively few states. 

In some of our states assessments of property are made by the 
taxpayers themselves. Each individual fills out a return stating 
the amount and value of his property both real and personal, 
and from these returns the assessing official compiles a list upon 
which taxes are collected. This system, or rather lack of sys- 
tem, can hardly be termed administration. It has not the first 
essentials of an assessment. W'hile the official entering the 



PROBLEMS OF TAX ADMINISTRATION 561 

valuations can make inquiries and change the total of property 
or of values from the estimates returned to him by the individual, 
it is obvious that this will be done in but few cases, since it in- 
volves a direct questioning of the veracity of the individual 
making the return. All such self-listing systems should be 
abolished. 

We deem it best at this time to refrain from any discussion of 
the subject of discipline of a local assessor. The question of the 
removal of a local assessor opens up a wide field of discussion. 
So does the question of the power of a higher authority to order 
a reassessment. 

The committee also passes for the present the question of the 
advisability of having all assessments for local taxes made by 
one assessor. In many states school taxes and other local taxes 
are assessed by assessors other than those who assess for the 
general local purposes. Much can be said in favor of consolidat- 
ing the work of local assessment for all purposes into the hands 
of one assessor. We have, however, confined our attention in 
this report to a consideration of the quality of the work of the 
local assessor, and have not attempted a consideration of more 
efficient or more economical administrative machinery. 

2. Boards of Review and Equalization 

A. LOCAL BOARDS 

Local boards of review, whose jurisdiction is coterminous 
with the local assessment district, and which are composed 
wholly of the local assessors, should be abolished. Your com- 
mittee does not mean by this that local boards of review must 
necessarily be abolished, but that, if they are to be continued, 
their membership should be changed. 

We are not prepared to formulate a general rule on this 
subject. All that we recommend is that in the composition of 
the local board there should be provision for one or more mem- 
bers who, if possible, should be men having some knowledge of 
values and who are in a position to resist the influences which 
tend to induce concessions to powerful owners. How to ac- 
complish that is a serious problem. We offer as a suggestion 
the possibility of providing a place on such board to be filled 



562 SELECTED READINGS IN PUBLIC FINANCE 

by some one appointed by a higher administrative authority, 
such, for example, as the county board or the state tax com- 
mission or the state board of equalization. In such states as 
have a county assessor, as well as local assessors, the county 
assessor might be a member of the local board of review. 

The county board of review presents the same difficulty and 
we can only recommend that in a similar way provision should 
be made for a place upon such board for some one appointed 
by higher authority and thus free from local influence and 
prejudice. 

The State Board should be composed of men giving their 
entire time and attention to the work. 



B. STATE SUPERVISORY BOARDS 

An increasing number of states are establishing state tax 
boards or commissioners with the duty of supervising local as- 
sessment work. Sometimes this supervision is merely advisory, 
and the powers of such commissioners are confined to giving 
good advice to such local assessors as are inclined to listen. 
This is a step in advance, but a small one. In other states the 
powers of the board extend to ordering a reassessment of all 
the property in a district and the making of a new assessment 
roll, upon evidence of gross inequalities. In one state at least 
the State Board has the authority, upon appeal or upon its own 
motion, to correct the individual assessments in any tax district. 
Necessarily, as in the case of appeals to local boards, this power 
can be exercised but rarely. If it were exercised frequently, such 
a board might as well be charged with the duty of making or 
directing the original assessments. 

The existence of these powers is a stimulus to local assessors 
to be more careful and diligent in their work. But the greatest 
benefit from such centralized supervision is in preventing un- 
equal assessments through proper instruction of local assessors 
and the installation of correct assessment methods, rather than in 
attempts to correct the errors after they are made. 

In the states where assessments are now, and are likely to be 
for some time to come, made by an assessor elected for a small 
district like a township or village, whose pay v., small and who 
will not and cannot be expected to give much time to his work, 



PROBLEMS OF TAX ADMINISTRATION 563 

much can be done if some central authority is empowered to 
give advice and actual help to these local assessors. This can 
be done either through traveUng agents, or, preferably, through 
district or county supervisors, who, on the one hand, shall be re- 
sponsible to the State Board for the general results in the dis- 
trict which they supervise, and, on the other hand, will be looked 
upon by the local assessors as part of a local administrative 
system rather than as agents of a central power. 

An important function of such supervisory boards is the 
collection and publication of statistics relating to the assessment 
and collection of taxes in the various local subdivisions. Such 
compilations are essential to enable proper comparisons to be 
made of the efficiency of local administration. 

3. Publicity 

A further aid to the improvement of local assessment work is 
to secure the fullest possible publicity for the results. This can 
be accomplished in various ways, depending somewhat upon the 
character of the tax district. In any event, assessment rolls 
should be open to public inspection without hindrance for the 
longest possible period of time both before and after the con- 
firmation of the assessment roll. In some manner notice of the 
impending assessment should be given personally to the tax- 
payer, and an invitation be extended him to come and inspect 
the rolls and make comparisons with his neighbor's assessments. 
Where changes in value are frequent, as in cities, and the indi- 
vidual resident is not personally familiar with the size and value 
of property holdings, the assessment lists may be printed at 
varying intervals and distributed in pamphlet form. 

The greatest aid to publicity, however, will be found in the 
preparation and use of assessment maps, because the use of such 
maps will assist the assessors to better work, and will more than 
anything else enable a taxpayer to study and compare his assess- 
ment with his neighbors. It is the difficulty that now attends 
such comparison which creates most of the feeling of injustice 
and antagonism. The objection to paying taxes is greatly mini- 
mized when each taxpayer feels that his neighbors are subjected 
to the same burden, equitably distributed. 



564 SELECTED READINGS IN PUBLIC FINANCE 

Conclusion 

Your committee has merely suggested some of the remedies 
for the defects in the administration of the general property tax. 
We do not feel justified in making any positive selection out of 
these various methods. Some of the changes proposed could not 
be adopted by some states because of existing constitutional re- 
strictions. Other changes would not be adopted because of local 
conditions, or would have to be modified so as to coordinate 
with the administration of other departmental functions. We 
sum up the result of our consideration of this subject as 
follows : 

First, that the present administration of the general property 
tax, from which 75 per cent of state and local revenue is derived, 
is unsystematic, antiquated, and unequal. 

Second, that substantial improvement can be secured only by 
improving the ordinary local assessment work. 

Third, that this can best be done by such readjustment of local 
assessment systems as will insure to local assessors better pay for 
their work. 

Fourth, that where practicable local assessment districts should 
be made sufficiently large to justify the employment of the whole 
time of a competent assessor. 

Fifth, that a central supervisory board which will furnish 
advice and help to local assessors, either directly or through a 
district supervisor, can secure great improvement in the original 
assessment work and minimize inequalities. 

Sixth, that full publicity of assessment matters, both of the 
details of local assessment rolls and by comparative statistics 
issued by the central supervisory body, will also help to improve 
local administration. 

61. The Assessment of Real Estate: Report of a Committee of 
the National Tax Association.^ — This committee, after present- 
ing its first report a year ago, was continued for further investi- 
gation of the general subject assigned and was charged with 
the additional duty of preparing tables, rules, and general 
instructions for the assessment of real estate. 

^ Reprinted from the Proceedings of the National Tax Association,Yo\.Y, pp. 34 5-362. 



PROBLEMS OF TAX ADMINISTRATION 565 

It is difficult to proceed along the line assigned to us without 
some discussion of the powers and duties of local assessors and 
the various methods existing in the different states for the 
review of assessment ; but as there is a committee on adminis- 
tration of tax laws, which is considering these topics, we shall 
refrain from any comment thereon as far as practicable. We 
shall endeavor to consider only the methods and schemes of 
work which are being applied or may be adopted by assessors in 
their actual assessment of property. 

In our report last year we presented as one of the essentials 
in a proper classification of real estate the necessity for a separa- 
tion of land and improvements in the field work of the assessor 
and the statement of such separate values on the tax roll. This 
we now repeat and emphasize. In the same manner we renew 
our recommendation for tax maps in each district as a foun- 
dation for assessment work, and for the preparation of land- 
value maps on which the unit values of land may be set down 
in such a way that the gradations of value from one point of 
high value to the next point of high value may be seen at a 
glance. 

The committee desires that in reading this report there should 
be kept in mind the passages in its report of last year referring 
to the need of assessment in rem rather than in personam, and 
the need of full-value assessment, and also the discussion at the 
last conference on the question of the need of true consideration 
in deeds for the purpose of supplying the local assessor with the 
data for making equitable assessments.^ 

These, however, are all general propositions, and, even if they 
should all be enacted into law or embodied in the rules and 
regulations of tax departments or boards of assessors, will not 
supply the assessor with the necessary rules for the assessment 
of a particular lot or a particular building. 

Your committee has not been able to undertake a complete 
canvass of all local assessment districts, nor of any large number 
of cities. Most of the committee, however, as members of state 
supervisory boards, have been sufficiently in contact with local 
assessment conditions to render such detailed investigation super- 
fluous for present purposes. 

^ See also the address on " Uniform Listing of Real Estate," by L. G. Powers, 
Chief Statistician Census Bureau, at the Third Conference, 1909. 



566 SELECTED READINGS IN PUBLIC FINANCE 

Little progress has been made, except in a few localities, 
towards developing systematic methods of real estate assess- 
ment. This is due, we believe, chiefly to the short terms of 
office of local assessors or tax boards. It is due also to the popu- 
lar belief, now happily diminishing, that a proper and equitable 
assessment of real estate can easily be made by any person fa- 
miliar with the locality who will merely make a diligent personal 
inspection of the various properties therein. 

In some localities, chiefly in cities where assessors have had 
permanent tenure, much progress has been made in developing 
systematic methods of assessment. In many other localities good 
work is done because of the knowledge and experience of the 
assessors, but without such systematic development as to make 
this knowledge or experience readily available for their succes- 
sors or for the information of inquirers from elsewhere. If we 
refer in this report chiefly to the methods of a few cities, this 
is because they have developed their methods sufficiently to en- 
able assessing officials from other localities to profit by their 
experience, and many have availed themselves of the opportunity. 

The task of the assessor is to measure the value of each lot 
and building, and to do this accurately and scientifically he must 
have some standard of measure. Of course the actual assessed 
value set down upon the tax roll will be in dollars. Back of 
that statement in dollars there should be the entry, somewhere 
in the tax records, that the land value is composed of a given 
number of units of area, either in acres or feet, and of a given 
value, and that the building, in like manner, contains a given num- 
ber of units of dimension each of a given value. Our task, then, 
is to suggest a standard, or set of standards, for the assessor 
that shall have been tested by experience and shall be suffi- 
ciently simple to be readily employed and understood. 

Real estate for purposes of assessrtient may be considered in 
three groups : 

1. Ordinary real estate, such as (a) land and buildings in 
cities and (b) farm property in rural districts. 

2. Real estate of public-service corporations, including ease- 
ments in public highways. 

3. Mines, forests, and similar lands requiring some special 
knowledge to determine their value. 



PROBLEMS OF TAX ADMINISTRATION 567 

I. Ordinary Real Estate 
A. Lmtd and Buildings in Cities 

The highest values for given areas of land or of buildings are 
found in cities, and, in consequence of these high values, it is in 
cities that systematic methods for the assessment of real estate 
have been most highly developed. For this reason, and also 
because many of the ideas underlying a proper assessment of 
city real estate can be applied to other kinds, this class should 
be considered first. 

Two things are essential to an accurate assessment of city 
real estate. First, maps which shall show the area, dimensions, 
and locations of the real property and the various subdivisions 
of ownership, and, second, a separate statement of the value of 
the land and the value of structures thereon. 

TAX MAPS 

Tax maps for the assessment of real estate have been used 
in some cities for many years. The city of Newark began the 
lot-and-block system forty years ago. The cadastral system, 
applying to both city and country real estate, has been in use 
in the Province of Quebec for a much longer time. 

The lot-and-block system of assessment is the best plan for 
mapping. This consists of an official map, based on an actual 
survey, filed of record with some public officer, on which cer- 
tain areas are designated as "blocks" and which are given a 
fixed, unchangeable number. On such a map a block should 
be bounded by street lines. 

Within the block the map will be further subdivided accord- 
ing to the individual ownership of parcels. As lots are bought 
and sold, they may be united or subdivided, and when any 
change of this kind occurs, the map should be changed by some 
competent surveyor to conform to the new lines of ownership 
and the date of such change noted on the map. 

Within each block, all the lots should be numbered con- 
secutively, beginning with the number one for each block and 
continuing around the four sides of the block. 

It will be found convenient to so number the lots as to leave 
vacant numbers for new lots if there is a prospect of subdivision 
among the existing lots at the time the first numbering is made. 



568 SELECTED READINGS IN PUBLIC FINANCE 

When real estate is assessed by this lot-and-block system, the 
assessment roll may or may not carry the exact name of the 
owner. The assessment should be made against the particular 
lot as numbered on the city official map with such structures as 
appear thereon. 

In Newark assessments are entered upon the tax books by 
streets for convenient reference. The assessor begins at the 
end of a street, and proceeds continuously to the other end 
of the street, or at least to the boundary of his district, and 
makes the assessment by the block-and-lot number of the 
official map. 

In the city of New York, which has largely followed the 
Newark plan, the assessments are made entirely by blocks : 
first, of the frontage on one street, and then, continuing around 
the other three sides of the block. This method does not afford 
as easy comparison of different assessments along a given street 
as the Newark "system. However, this objection is overcome by 
the use of land-value maps. 

SEPARATE ASSESSMENT OF LAND AND IMPROVEMENTS 

The general method of stating a real-estate assessment is to 
set down opposite the description of the property one valua- 
tion which includes the value of both the land and the buildings, 
if any, thereon. This method renders intelligent comparison of 
values impossible. 

The separation of these two different elements of value is 
essential to an accurate assessment, and their separate statement 
on the assessment roll is necessary to enable proper comparisons 
to be made between the valuations of different parcels of 
property. 

A few states require by statute the separate assessment of 
land and of the buildings thereon to be entered upon the assess- 
ment roll. 

The method adopted in the city of New York in 1903, and 
this year extended by statute to all the cities in the state, re- 
quires merely a separate statement of the value of land, in 
addition to the statement of the total valuation of the real estate. 
The advantage of this method of separate assessment is, that 
it forces the assessor to recognize the economic fact that the 



PROBLEMS OF TAX ADMINISTRATION 569 

value of a building is simply the diflference between the value of 
the parcel of land with the building and what the same parcel 
would be worth if the building were removed. The difference 
between the two methods is slight when the improvements are 
new or perfectly adapted to the location, but in the case of old 
structures or those which are no longer suitable to the sites, the 
New York method is superior. 

One plan or the other, however, should be employed by the 
assessor in his work, and where practicable the values should 
be separately entered upon the assessment roll. 



ESTABLISHING STANDARDS OF VALUE 

When the actual work of assessment is undertaken, the first 
problem that confronts the assessor is to find a basis for valua- 
tion, that is to say, a standard of value by which to measure 
each parcel and in terms of which to express its relation to the 
standard. 

It is apparent that the primary need of the assessor is to de- 
termine for his own locality the normal unit of land area. This 
may be the lot of average size, say, 25 x 100 feet, or 50 x 150 
feet, or whatever is by common consent regarded as a normal 
lot in the particular city. It is impossible to lay down one unit 
for all cities. Lots in one city may be generally 100 feet deep, in 
another 150 feet, and in still another 200 feet. The normal width 
of such lot may be 20 feet in one place and 50 feet in another. 
But in each city or section thereof it is clearly possible to fix 
upon a lot of a given size as the normal. From this lot of nor- 
mal size, the assessor may easily determine the value of one- 
foot frontage of the normal depth, and from this smaller unit 
he can determine the value of a lot of normal depth of any 
frontage by simple multiplication. 

In Trenton, N. J., the Commissioners of Assessment keep a unit- 
value book, by streets, showing for each block on the street the 
front-foot value determined by the board for inside lots 100 
feet deep. These values are revised by the board annually before 
the actual assessment is made, and the book is ruled so that the 
values for several years appear in parallel columns. In New 
York the unit value used is noted by the assessor on his field 
book. 



570 SELECTED READINGS IN PUBLIC FINANCE 
RULES FOR VARYING DEPTH OF LOTS 

The next problem is to formulate a rule for valuing lots which 
are shorter or longer than the normal. This has been met in 
such cities as Newark, New York, and Baltimore by the use of 
tables, based upon the experience of the Tax Departments, on 
which are shown, in percentages of the whole, the value for 
each foot of depth. The Newark rule and the New York rule 
are not quite identical. The Newark rule gives a little more 
value to the front part of the lot than the rule in use in New 
York. We do not undertake to say that one is nearer the abso- 
lute truth than the other. Local conditions in each city may 
require a special table for such locality. A table similar to the 
Newark and New York tables should be prepared for each city, 
and should be used by the assessors. This table should be given 
the utmost publicity, and should be revised as occasion demands, 
whenever the assessors are satisfied that the need exists. There 
is this, however, to be said, that as soon as any table is generally 
accepted by the assessors and by the real-estate men of any city, 
the need of revision would practically disappear, because whether 
the rule conforms absolutely to the actual fact or not does not 
matter, provided purchases and sales of real estate in that city 
are substantially based on the use of such a rule. This has proved 
to be the fact both in Newark and New York. 

Fifty years ago in deciding a lawsuit Judge Hoffman of New 
York laid down the rule that an ordinary city lot 50 feet deep 
was worth two thirds as much as a lot adjoining which, was 
100 feet deep, the latter being the standard depth in the city 
of New York. This formula has been accepted generally by 
real-estate men and by the City Tax Department, and various 
rules and scales have been devised from it based upon the same 
principle. The Hoffman rule has been adopted in other cities 
also. 

The Hoffman rule, however, has been found to give too little 
value to the front portion of a lot or to a short lot as compared 
with a deeper one on business streets, especially where frontage 
values are high. Various modifications of this rule are employed 
by individual assessors in different districts. 

In the city of Newark, where front-foot valuiis are second only 
to those in the city of New York, a slightly different rule is 



PROBLEMS OF TAX ADMINISTRATION 571 

used. For business properties the Newark rule gives 50 per 
cent of the value to the first 25 feet, taking, also, a 100-foot lot 
for a standard. This is about the ratio used by the assessors in 
New York business districts. 

For lots deeper than 100 feet there is a decided variance in 
rules and opinions. Generally a 200-foot lot is estimated to be 
from 25 to 30 per cent more valuable than a lOO-foot lot where 
the latter is the standard. 

It should be noted also that experienced assessors do not all 
agree that 100 feet can be used as a unit when normal lots are 
150 to 200 feet in depth. 

In Baltimore the normal depth of lots in the business section 
is 150 feet. The table used in that city is calculated to show 
the percentage which a lot shorter than 150 feet bears to the 
standard size, and also the additional value of a deeper lot up to 
200 feet. This rule practically makes the rear 100 feet of a 200- 
foot lot worth 20 per cent of the front 100 feet. But in the 
comparative value of the first 50 feet of a loo-foot lot it comes 
closer to the Hoffman than to the Newark rule. 

Your committee expresses no opinion on these disputed points. 
We believe that the actual variation between the various rules 
is negligible compared with the enormous advantage of adopting 
some tested rule in place of an arbitrary judgment of each piece 
of property. 

The rules above discussed have been considered only in their 
application to lots of usable size. The rules may be used on 
narrow lots and lots of irregular shape, but they should be 
applied with caution, and the results should be carefully checked 
by a study of actual conditions and values. 

In actual assessment work the assessor will enter on his field 
map the unit value of a normal unit on each street, or, to be 
more accurate, on each side of each block. From this unit value 
he can then compute according to his table of percentages the 
land value of each lot of any size or shape upon that street, and 
enter the same on his assessment roll. 

Thus all the lots along the given block will bear a just relation 
to each other, and the same will be true of all the lots upon the 
frontage of any block in the city. 

It is to be observed, however, that while this method secures 
equality and precision among the lots along the side of a block 



5/2 SELECTED READINGS IN PUBLIC FINANCE 

or on the opposite sides of a street, it does not necessarily secure 
the proper relation between the assessments of lots in one block 
or one street with the lots in adjoining or neighboring streets 
or blocks. If we may compare the blocks to townships and the 
city to the county, we may say that the method above described 
has secured a proper equalization among the lots within the 
township, but has not provided for equalization among the 
townships in the county. 

In the city of New York provision has been made for equali- 
zation among the blocks by the use of land-value maps. 

LAND-VALUE MAPS 

An outline map of the city is used, subdivided into such areas 
as may be convenient. On each side of each street, for each 
block, the unit value of the normal unit is entered. Thus the 
relation of value on one street with values on another street is at 
once apparent. Points showing high value will grade off towards 
the points showing low values, and everywhere the values on 
one street will interlock with the values on the next street in a 
way that can be seen, understood, and explained. Accuracy and 
precision will be introduced into an assessment. The disturbing 
influences of abnormally high or abnormally low sales will be 
minimized, and the assessor will be doing what he ought to do ; 
namely, exercising his judgment in assessing all lots within a 
given area in their relative values to one another. 

The city of Milwaukee has for almost twenty years made a 
practice of using maps which have been termed "Equalization 
Maps," to assist in fixing unit or front-foot values. These 
maps are bird's-eye views of each ward drawn to scale, on which 
are shown each square or block of land bounded by streets or 
alleys. There is also shown on each map a tier of blocks of all 
the surrounding wards or adjoining property for the purpose of 
making comparisons. On these maps the assessed values of the 
land are shown on all sides of each block, so that comparisons 
can readily be made with all parts of such ward or adjoining 
wards. 

CORNER VALUES 

One of the hardest problems presented to the assessor is to 
determine corner values. On this point the committee is unable 



PROBLEMS OF TAX ADMINISTRATION 573 

to discover any common rule among assessors. There seems to 
be no agreement as to how far the corner influence extends 
down the side of the street, or how far back it extends from 
the street front. 

Corner influence, of course, is a fact, and a corner lot has a 
much greater value than an inside lot. All that we can at 
present say on this point is that the consensus of opinion appears 
to be that corner influence varies according to the use to which 
the property is put, being greatest in retail business districts 
and smallest in suburban residence districts. 



BUILDING VALUES 

It is much more difficult to establish standards for assessing 
buildings than for assessing land. The assessor should have 
some formula, sufficiently flexible, by which to appraise the 
building. The cost of construction for a new building, of the 
type of the building under consideration, can be worked out. 
This is not a difficult problem ; real-estate men and builders can 
readily supply the assessor with this information. From such 
information he can construct a table, made up of definite types 
of buildings, of definite size and construction. If this table 
is sufficiently worked out, it may be made to include all types 
of buildings coming within his jurisdiction. If such table is not 
worked out in this detail, it is possible for the assessor to reduce 
his table so as to show the cubage cost or the cost per square 
foot of floor space for each type. Then by ascertaining the 
cubage or the floor space of the given building and multiplying 
it by his unit cost he will have the approximate cost of con- 
struction of such a building. 

This, however, does not allow for depreciation. Attempts have 
been made to work out tables of depreciation based upon age, 
but we have not been able to learn of any table of this kind 
that is really satisfactory or accurate. 

Another thing that must constantly be borne in mind in assess- 
ing buildings is that the building must be suitable to the site. 
A residence standing in the midst of business buildings, far from 
the usual residence neighborhood, will have small selling value. 
It may be in the best of repair and admirably designed for 
residential purposes, but its value will be practically nil, because 



574 SELECTED READINGS IN PUBLIC FINANCE 

it is unsuited to the site. Every city, doubtless, has many 
instances where the transition from residence to business uses has 
taken all value from some buildings. To assess such buildings 
on the basis of construction cost or on their actual conditions 
as dwellings would be a great injustice to the owners. 

An assessor can be sure of his land values. But when he assesses 
buildings by the use of building factors, the result in each case 
should be tested by his judgment of the additional selling value 
which the building gives to the lot on which it stands. If the 
total of land value and building value as thus assessed exceeds 
the actual selling value, the assessor should go over his figures 
and reduce his building factor. Otherwise he will not make 
proper allowance for deterioration or inadequacy of the im- 
provement to the site. 

B. Land and Buildings in the Country 

AREA 

The first requisite is a determination, as accurate as possible, 
of the area of each separately assessed parcel. If there is a 
tax map, this should show the area. In most country tax dis- 
tricts at the present time there is no tax map, and absolutely no 
means exists for verifying the guess at the area of a farm which 
the assessor makes when he compiles his tax roll. The dis- 
crepancy which appears so frequently when one attempts to 
compare the total area of the assessed land in a township with 
the actual area of such township is startling, and the conclusion 
is inevitable that much land has not been assessed at all. In 
fact, it may be accepted as of common knowledge that the 
number of acres assessed to the owner of a farm is often well 
under the size of the farm. A tax map of some sort is a pre- 
requisite to equitable and scientific assessment work in country 
districts, but, as said in our former report, such tax map may, 
in the beginning, be merely an outline sketch map, if nothing 
better is available. 

SEPARATE ASSESSMENT OF LAND AND IMPROVEMENTS 

We do not feel it necessary to repeat or enlarge on what was 
said on this subject in our former report, to v/hich we beg to 
refer. 



PROBLEMS OF TAX ADMINISTRATION 575 

ESTABLISHING STANDARDS OF VALUE 

The problem of fixing a standard of value is presented to the 
country assessor just as to the city assessor, but it is not the 
same problem. In cities frontage is the chief element of value 
in lots. But frontage is of small relative importance in the 
country. To assess two lots in a city, of equal frontage, but 
of different depths, by square-foot value would produce gross 
inequality. In the country to assess two farms of equal area and 
fertility, but with unequal frontage on the highway, by a front- 
foot rule, would in turn produce gross inequality. Superficial 
area or acreage must be the rule for assessment in the country. 

The country assessor does not have to determine a normal 
unit of area as does the city assessor. The acre is the com- 
monly accepted unit. But he has the same problem as the city 
assessor of establishing the value of his unit at different points 
in his district. 

We recommend the same method as for city assessors ; namely, 
land-value maps. 

LAND-VALUE MAPS 

On each road the value of an acre of each class of land, into 
which the land in his district is divided for purposes of assess- 
ment, should be determined. From such unit values the value 
of the acreage in each farm can be determined, making due 
allowance for rock, gully, hillside, etc. 

In our last report we discussed at length the classification of 
land for assessment purposes, particularly rural land. The coun- 
try assessor can enter on the maps at appropriate points the 
values which he has determined upon as the normal value per 
acre of land of these different classes. Then by looking over the 
maps as a whole he can readily see whether he has made suffi- 
cient allowance in these acreage values for differences of loca- 
tion, topography, transportation facilities, improved highways, 
and other advantages or disadvantages. 

BUILDING VALUES 

The assessment of buildings in the country does not present 
problems differing from assessment of buildings in the city, and 
the country assessor can use the same rules as the city assessor. 



576 SELECTED READINGS IN PUBLIC FINANCE 

He will have fewer types to deal with, and the problem should 
be easier for that reason. We desire, however, especially to 
caution country assessors to make a proper allowance for depre- 
ciation in the value of buildings, for the methods of construction 
and the failure to keep up proper repairs in country buildings 
cause them to deteriorate much more rapidly than city buildings. 

2. Public-Service Corporations 

The property of public-service corporations should be assessed 
as a unit. This rule, if followed, will remove most of such prop- 
erty from the local assessors, as by far the largest amount of 
public-service-corporation property extends through more than 
one tax district. The manner of distributing taxes collected upon 
the value of public-service-corporation property when assessed 
as a unit, and whether such property should be assessed at one 
rate or at local rates through an apportionment of assessed 
values among the local tax districts, are questions outside the 
scope of this committee. Our suggestion is merely that the 
assessment of this property should be made as a unit by one 
assessing authority. This, however, is impracticable in some 
states because of constitutional provisions. 

Where the local assessor must continue to be charged with the 
actual assessment of the property or franchises, or both, within 
his district, of a public-service corporation whose lines extend 
through several districts, he should, where practicable, be guided 
and controlled by positive regulations, prescribed by central 
state authority, so that there may be uniformity of assessment 
of this class of property. 

So much of the value of public-service-corporation property, 
however, depends upon its employment as a unit and its actual 
or potential earning power, that a local assessment at physical 
valuation is rarely satisfactory to any one. 

3. Forests, Mines, and Quarries 

The local assessor is, as a rule, poorly equipped for making 
a valuation of unusual classes of real estate such as we have 
embraced in the general terms of forests, mines, and quarries. 
Such assessment work requires special knowledge and skill. 
A State Tax Commission can be of great assistance to local 



PROBLEMS OF TAX ADMINISTRATION 577 

assessors in furnishing data and rules for the assessment of 
such property. 

In the state of Washington, for example, the State Tax Com- 
mission has conducted "timber cruises" for the purpose of 
mapping the timber lands of the state. The commission has 
prepared maps of a number of counties, subdivided into sections, 
and has noted upon each map the character of the timber in 
each of these subdivisions, together with other information of 
great assistance in valuation. 

The Minnesota Tax Commission has conducted extended in- 
vestigations of the iron-ore deposits, and has compiled tables 
showing the relative values per ton of the various grades of 
iron-ore deposits. 

Wherever practicable, assessments, or at least a valuation, 
of such unusual real estate should be made by a State Board 
for the information of local assessors. Where this cannot be 
done, it would be advisable in many cases for the local governing 
officials to have a valuation made by a competent person, or 
persons, for the guidance of local assessors. 

Conclusions 

1. A tax map should be used in each tax district. Accurate, 
equitable, and scientific assessment cannot be made without an 
accurate map as a base. 

2. Land and improvements should be separately assessed. 

3. Standards of value should be established by each assessor, 
for land and for buildings, to assist him in the exercise of his 
judgment. 

4. A table of values, by which to determine the relative 
value of lots of varying sizes, should be established and used in 
each city. 

5. Land-value maps, on which the unit values of land through- 
out the city are shown, should be prepared and used in each city. 

6. A table of building factors should be prepared and used 
by assessors, from which, when applied to cubage or square- 
foot floor area, the approximate value of a building may be 
determined. 

7. Land-value maps would be of great assistance to assessors 
in rural districts. 



CHAPTER XV 

THE IMPOT PERSONNEL-MOBILIER 

62. General Description of this Tax. — The impot personnel 
mobilier occupies a pecuUar position in finance; nothing pre- 
cisely like it can be found in the tax systems of other countries. 
The following is a general description of the tax : ^ 

TYiQ personnel-mobilier, as its name indicates, is composed of 
two taxes, the personal tax and the mobilier, which in certain 
respects are subject to different regulations. 

This tax is due, in general, from every citizen of France and 
every foreigner, enjoying civil rights ^ and not indigent. 
******* 

The personal tax is the same for all the inhabitants of any 
locality, and is equal to three days' wages. The general council 
of each department fixes each year . . . the average value of a 
day's labor for the department. It cannot, however, value it 
lower than fifty centimes or higher than one franc fifty cen- 
times.^ 

******* 

The mobilier^ is assessed according to the rental value of in- 
habited houses. This is the legal basis of the tax ; and it is not 

1 Translated from the Dictionnaire des finances, II, 849 et seq. (Paris, 1889-94). 

2 The following classes of persons are not included here : married women living 
with their husbands ; or children, whether they have reached their majority or not, 
who live with their parents or guardians and do not have an independent income 
from property or labor. — Ed. 

3 In about half the communes the tax is fixed at 50 centimes per day, or 1.50 
francs in all. In 1891 only 5 communes valued a day's labor at the maximum figure 
and placed the tax at 4.50 francs. — Ed. 

* The tax is called the mobilier, since it was designed originally to reach revenue 
derived from personal property, and employed the rental value of a person's habita- 
tion merely as a method of estimating this form of income. It was complementary 
to the land tax, which reached revenue from real property. — Ed. 

578 



THE IMPOT PERSONNEL-MOBILIER 579 

possible to find a satisfactory substitute, as is often attempted, 
in the assumed ability of the taxpayer, the income from his real 
estate, or the profits drawn from the soil. 

63. The Working of the Impot Personnel. — Leroy-BeauUeu 
gives the following account of this tax:^ 

The personal tax is joined to the mobilier ; and the two 
taxes form together an apportioned tax.^ In the apportionment 
the fixed rates estabUshed for the personal tax are maintained 
by the following process. In raising the quota of the personnel- 
mobilier due from each commune, the taxpayers are first as- 
sessed for the personal tax according to the rates fixed for the 
value of a day's labor. This assessment falls short of the entire 
amount of the commune's quota, and the balance then remain- 
ing is assessed upon the taxpayers according to the rental 
value of the dwellings they occupy. 

The personal tax in France presents two peculiarities, one of 
which is met in several other countries. In communes that levy 
octroi^ duties the quota due upon the personnel-mobilier may be 
paid in whole or in part out of the proceeds of the octrois. . . , 
If only part of \kv^ personnel-mobilier is raised in this way, the 
rest of the quota must be raised by means of the mobilier. It 
even happens, as a rule, in such cases that the persons paying 
the lowest rentals are exempted from the m,obilier as well as the 
personal tax. 

It is easy to understand the reasons which in France lead 
municipal councils to do away with a direct tax, even though it 
is a light one, upon persons who already pay the indirect octroi 
duties. I consider, nevertheless, the disappearance of the per- 
sonal tax in the larger cities of France as something to be re- 
gretted. Believing in the maxim that every one should pay a 
direct tax, I should prefer that the personal tax, and even the 
mobilier, should continue in the large cities ; and that some of 

1 Translated from his Traite des finances, Pt. I, Bk. II, ch. 5. 

2 An apportioned tax is one that is not assessed directly upon individuals at 
established rates ; but is first apportioned among the smaller civil divisions, the 
quota due from each division being finally assessed upon individuals. — Ed. 

^ Duties levied upon liquors, provisions, and sometimes other articles, upon their 
entry into towns. — Ed. 



58o SELECTED READINGS IN PUBLIC FINANCE 

the octrois, particularly those on indispensable articles of food, 
should be reduced or abolished. 

The second peculiarity is that, by the law of 1832, the per- 
sonal tax is not subject to sur-taxes^ for any purpose, whether 
national, departmental, or communal. The personal tax, there- 
fore, not being subject to sur-taxes, varies from the minimum 
rate of one franc fifty centimes to the maximum rate of four 
francs fifty centimes, according to the commune. If it were 
really intended to make it equal to the value of three days' 
labor, the rate should range at least from four and one half to 
nine francs ; for there is no part of France where a day's wage 
is less than one franc fifty centimes, while in large cities and 
prosperous agricultural or industrial districts it never falls below 
three francs. Naturally enough the yield of the personal tax in 
France is very small, because the valuations of a day's labor 
are so low. But the number of persons subject to the tax has 
steadily increased. . . . 

The number of persons paying the personal tax, including 
those whose contribution is defrayed out of octroi duties, was 
not less than 7,799,000 in 1866. To-day, despite the loss of 
Alsace and Lorraine, it has reached the figure of 8,000,000. If 
the valuations placed upon a day's labor were raised to the cor- 
rect figures, — one and one half francs for the poorer districts 
and three francs for the cities and the richer districts, — the 
assessment would be 5.25 francs per contributor, even if the 
average day's wage were placed as low as 1.75 francs. This 
rate for 8,000,000 of contributors would bring in 42,000,000 
francs, or about 26,000,000 francs more than the present yield. 
This simplification in our finances would permit us to abolish 
certain objectionable indirect taxes, like that on salt, the product 
of which is 30,000,000 francs. This would be a very desirable 
result. . . . 

Far from rejecting all capitation taxes, I believe that a moder- 
ate tax like that just described would have an excellent effect. 
It would dispense with indirect taxes upon such a necessity as 
salt ; would make the people feel that the payment of a tax is a 

1 In France departmental and local expenses are met largely out of sur-taxes 
{centimes additionnels) added to the rates collected for national purposes. Some- 
times a sur-tax is levied for national purposes. — Ed. 



THE IMPOT PERSONNEL-MOBILIER 581 

necessary accompaniment of the enjoyment of civil rights; and 
would teach them that the government can collect directly from 
the laboring classes at least a part of their share in the expenses 
of the state. 

64. The Working of the Impot Mobilier. — Although intended 
to be a proportional tax upon the rental value of dwellings, the 
mobilier, in its actual operations, is something different from 
what the law contemplates. Boucard and J^ze give the follow- 
ing account of the working of the tax : ^ 

The mobilier, in law and in practice, is tending to become a 
progressive tax. 

This tendency in practice is the result of changes prescribed 
by custom. In order to understand this custom, it is necessary 
first of all to notice that the mobilier is joined to the personal 
tax, and that the combined tax {persomiel-mobilier') is appor- 
tioned.^ In other words the amount to be raised for national 
purposes is fixed each year by the law regulating the finances 
(/<2 loi de fiitances), and is divided among the departments by 
the same law.^ The quota of each department will be divided 
among the arrondis s ement s hy the general councils; and the 
quota of each arrondissement will be divided among the com- 
munes by the council of the arrondissement. Then the quota of 
each commune will be assessed upon the taxpayers by officials i_ 

1 M. Boucard and G, Jeze, Cours elementaire de science des finances, 347 ei seq. 
(third edition, 1903). 

2 The authors explain, as Leroy-Beaulieu does, the method of keeping the rate 
of the personal tax fixed while apportioning the mobilier. They then give this 
illustration : 

" Suppose that the quota of a commune is looo francSo Suppose, too, that the 
total assessment of the personal tax (that is, the value of three days' labor for all 
taxpayers) is 300 francs. The difference, or 700 francs, will be assessed pro rata 
upon rentals by the provisions of the fnobilierP — Ed. 

^ Naturally enough, the result of apportioning the tax has been to produce shock- 
ing inequalities between departments, arrondissements, and communes. . . ^ The 
equalization of the apportionment constitutes a serious problem. (The authors go 
on to show that in some communes the quota to be raised is as low as 2 per cent 
of the rental value of all dwellings, and that in others it rises to such a figure as 10 
per cent or more. In 1901 a law was passed to alleviate the situation, but it does 
not meet the needs of the case.) 



582 SELECTED READINGS IN PUBLIC FINANCE 

appointed by the prefect from a list presented by the municipal 
council. In this work the officials do not follow the law, which 
prescribes pro rata assessment of rental values. In 1.884 it was 
ascertained that in 2340 communes, representing 1,733,000 con- 
tributors and 24,305,000 francs of the principal of the tax, the 
mobilier was based upon rental values, in accordance with the 
law. In 1657 communes, representing 238,000 taxpayers and 
732,000 francs of the tax, the assessment was based upon rental 
value, but without precise rules and without always following 
the rule of proportionality. In 18,664 communes, representing 
2,684,000 taxpayers and 8,351,000 francs of the tax, the officials 
assessed the tax according to the rental value and the supposed 
ability of tJie taxpayei's. Finally, in 13,446 communes, represent- 
ing 1,981,000 taxpayers and a tax of 6,280,000 francs, the assess- 
ment was based upon the supposed ability of the taxpayers as 
estimated by various indicia such as the area of cultivated land, 
the amount of live stock owned, the number of teams of horses, 
or such other indications as accorded with the conditions of the 
regions and the habits of the people. Thus there were only 
3997 communes out of 36,107 which conformed to the require- 
ments of the law ; and in over 32,000 communes the assessment 
was according to the discretion of the officials. In the same 
locality one could find some of the rentals taxed at double the 
rate imposed on others. The conditions have not changed since 
1884. It is known that in most of the rural communes, where 
the dwellings are much the same whatever the wealth of the 
occupants may be, the assessors, struck by the fact that often 
two taxpayers of very unequal ability are housed in about the 
same manner, have made the tax progressive by increasing the 
assessed valuation. 

The progressive character of the tax has also been sanctioned 
by the law, through exemption of a certain minimum rental. 
(Then follows an account of certain provisions of laws enacted 
in 1846, 1900, and 1903, which sanction in certain cases a de- 
parture from a proportional rate of taxation.^) 

^ One other fact concerning the practical working of the tax is emphasized by 
Leroy-Beaulieu. When the quota of the personnd-niobilier due from a commune is 
apportioned among the taxpayers, it is clear that, the lower the value placed upon a 
day's labor, the smaller the amount raised by the personal tax, and the larger the 



THE IMPOT PERSONNEL-MOBILIER 583 

65. The Theory of the Impot Mobilier. — Interesting to Ameri- 
can readers, on account of various proposals which have been 
made in the United States, is Leroy-BeauUeu's discussion of the 
merits of the impot mobilier. He says : ^ 

When the legislator abandons the idea of taxing directly the 
entire income of the taxpayers because he does not wish to resort 
to arbitrary official assessments and apprehends the deceptions 
which result from calling for personal declarations of one's 
income, the best method of taxing citizens according to their 
abilities is to impose a tax upon the rental value of dwellings. 
The house rent that a man pays is the least deceptive index of 
the size of his property or income. Among people who love 
material comforts and luxuries the first use generally made of 
wealth is to enlarge and to embellish one's dwelling. 

The opponents of this tax (the mobilier), who are usually 
advocates of a general tax on property or income, find many 
objections to it. Certain persons, they say, by their natural 
tastes, for reasons of family convenience, or by professional 
necessity, expend for house rent a larger portion of their income 
than is ordinarily devoted to that purpose ; while others, on 
account of simpler tastes, or for economy's sake, spend but a 
small part of their income for rent. The first class will be over- 
taxed, and the second undertaxed, by the 7nobilier. This objec- 
tion is specious. It proves that the tax on rentals is not perfect ; 
and persons who are sanguine of attaining absolute perfection 
in fiscal affairs, can reject this tax as not realizing their ideals. 
But though specious, the objection is not well founded. In the 
first place, the law can permit a taxpayer to furnish proof that 
the income which his lodgings indicate that he has is larger 
than his real income. There would be nothing unjust in de- 
manding that a person in an unusual situation should demon- 
strate the fact. As for the demands which a profession, like 
that of the doctor or lawyer, make upon one's income, it 
would be possible to take. this element into account in assessing 

amount to be raised by the mobilier, will have to be. Since the valuations of a day's 
labor range from 50 centimes to 1. 50 francs, it is clear that the rate of the mobilier 
must vary considerably. — Ed. 
1 Traite, Ft. I, Bk. II, ch. 7. 



584 SELECTED READINGS IN PUBLIC FINANCE 

the tax. In this way the tax could be reduced for taxpayers 
whose profession obliges them to occupy dwellings that are more 
expensive than those occupied by most persons having the same 
income. Yet these deductions and allowances do not seem very 
necessary since the rate of the tax ought always to be moderate. 

It is probable that after a time, and just because of the tax, 
every one will spend for rent just about the proportion of his 
income which the law assumes that he spends. Few people 
would care, through ostentation or negligence, to place them- 
selves in a position where they would have to pay a dispropor- 
tionate tax. As for misers who wish to cheat the government 
by occupying lodgings far less expensive than they could afford, 
it is evident that it is difficult to prevent them from doing so in 
any case. . . . 

An objection of greater weight is that the tax on rentals bur- 
dens large families more heavily than small ; whereas the 
former should rather be favored than burdened by the tax- 
gatherer. We may observe that this objection is equally valid 
against taxes upon consumption, although not against a general 
tax on property or income. . . . But the difficulty is easily 
avoided. It would be removed if, in the assessment of the tax, 
allowance was made for the size of families. A bachelor could 
be taxed at a higher rate than a man with a family ; and, further, 
the tax could be reduced in rate according to the number of 
children in a family. Thus, supposing that the rate of the tax 
were 12 per cent of the rent paid by a bachelor, it could be 
reduced to 10 per cent for a married man ; and might be low- 
ered by one per cent for each child living with its parents ; so 
that a family with four children would pay but 6 per cent of the 
amount of rental, while a bachelor would pay 12 per cent. 
(The author then argues that the mobilier taxes funded incomes 
more heavily than unfunded, since, income for income, persons 
who draw revenue from property will spend more for rent than 
persons with temporary incomes.) 

To this tax on rentals could be added, as the Constituent 
Assembly did in 1791, certain simple sumptuary taxes, such as 
taxes on pleasure carriages and servants. We shall discuss 
such sumptuary taxes later. Here we may say that if they are 
added to the mobilier, the rate should increase according to the 



THE IMPOT PERSONNEL-MOBILIER 585 

number of carriages or servants. The tax, for example, should 
increase 10 per cent if the taxpayer keeps horses and carriages, 
and should increase 5 per cent for each male servant. 

^ "iit "Sp- ^ 7|c Tl? i(e 

The preceding discussion has shown that the tax on rentals, 
which is called improperly the mobilier, is one of the best that 
exists. It certainly is not perfect ; ^ but it can be made propor- 
tional to the income, or, rather, the ability, of the citizens as 
closely as is possible in fiscal affairs. It avoids arbitrary 
methods. And finally it can be made very productive. The 
rental value of all buildings in France may be estimated at not 
less than 2,000,000,000 francs. From this we must make some 
deductions in order to obtain the rental value of dwelling houses ; 
shops, factories, and stores should, therefore, be left out of the 
estimate. The rental value of dwellings cannot be less than 
1,800,000,000 francs. An average tax of 10 per cent, for state 
and local purposes, would yield 1 80,000,000 francs ; whereas 
the present mobilier, with the personal tax included, yielded 
only 164,000,000 in 1896. 

66. Proposals for a Tax on Rentals in the United States. — The 

New York Tax Commission, in 1871, proposed that the state 
should levy a tax on rentals, as a substitute for the existing tax 
on personal property ; and similar recommendations have come 
occasionally from other sources. As lately as 1897 the Mas- 
sachusetts Tax Commission, after recommending that the present 
taxes on intangible personalty be abandoned, proposed that a 
tax on direct inheritances and a tax on ** the occupants of habita- 
tions " should be introduced as substitutes. In defense of the 
suggested tax on rentals, the commission said r^ 

We have said, when discussing the possibility of an income 
tax, that some contribution in proportion to income enjoyed 

1 Elsewhere the author says : "The great fault of the mobilier is that it is an 
apportioned tax. The quota demanded from each political division is based upon 
old assessments, and the product of the tax does not keep pace with the increase of 
wealth. . . . The only way to reform it is to change it into a rated tax." — Ed. 

* Report, pp. 104-109. 



586 SELECTED READINGS IN PUBLIC FINANCE 

would be a desirable addition to the tax system of the common- 
wealth. In addition to the tax on inheritances and successions, 
something more in the way of immediate and direct contributions 
from present incomes seems to us desirable, both as a supple- 
ment to the inheritance tax and as an addition to the financial 
resources available for public expenditures. 

For this end we recommend for adoption by the General 
Court a tax on presumed or estimated income, based on the 
expenditure of the taxpayer for dwelling-house purposes. We 
propose that a tax shall be levied on all persons occupying 
dwellings of an annual rental value of more than ^400, at the rate 
of 10 per cent on the excess of rental value over that sum. 
We propose to levy no tax of this sort on persons whose incomes 
are so moderate that their expenditure for dwelling accommoda- 
tion is not over ;^400 a year. Those whose income is such that 
they exceed this expenditure for their dwellings, are to pay, not 
in proportion to their total dwelling rental, but in proportion to 
the excess of rental over the exempted limit of ^400. Thus, 
a person occupying a house whose rental value was $500 would 
pay a tax of ^10 a year, this being 10 per cent on the excess of 
the rental value over ^400. A person occupying a house whose 
rental value was $600 would pay a tax of ;^20 ; a house of ;^8oo 
rental, $d^O', a house of ^1200 rental, ^80; and so on. The 
tax, it will be observed, is on the occupier of a dwelling, and of 
a dwelling only. Houses or parts of houses used for business 
purposes are in no way affected by it. The tax is to be levied 
on the occupier, whether he be owner or tenant. If owner, it 
is a tax on his general income, additional to the direct tax which 
he pays as owner of the house. If tenant, it is again a tax on 
his general income, separate from the direct tax which the land- 
lord pays on the house. In either case, it is a tax on presumed 
or estimated income, proportioned (in the manner described) to 
the expenditure for dwelling accommodation. 

In the bill which we submit for this tax, we have endeavored 
to make appropriate provision for the difficult cases which 
would need to be considered in its administration : for apart- 
ment houses, where the separate apartments or tenements may 
be above or below the exempted amount ; for baildings occupied 
partly for trade and partly as dwellings; for boarding and 



THE IMPOT PERSONNEL-MOBILIER 587 

lodging houses ; and so on. As to the specific legislation which 
seems to us best for these details, we refer to the several clauses 
of the bill. We wish here to bring to the attention of the 
General Court the advantages of such a tax, which seem to us 
to outweigh its disadvantages, undeniable though the disadvan- 
tages be. 

It may be contended that such a tax is unequal in its opera- 
tion. It bears more heavily on a man of large family than on 
one of small family, since the former will probably spend a 
larger proportion of his income on dwelling accommodation. 
It may not reach at all a bachelor, perhaps of good income, yet 
not called on to spend much of it for his lodgings. In general, . 
expenditure for dwellings is only a rough and uncertain test of 
income. Two men of the same income may occupy very differ- 
ent sorts of houses ; while, on the other hand, a rich man and a 
man of moderate means may occupy houses of the same general 
character. As a man grows richer, while he will probably spend 
more for his dwelling, it is very possible that he will not spend 
a sum larger in proportion to his increased means. 

These disadvantages are real. As compared with an ideally 
arranged and ideally administered income tax, this form of tax 
is not to be commended. But no perfect income tax, indeed, 
no perfect tax of any sort, is within reach ; and we must com- 
pare any proposed tax, not with the best that could be got under 
ideal conditions, but with the best that is practically available. 
Every system of taxation brings occasional hardship and in- 
equality. The essential question is whether a given method of 
taxation secures on the whole substantial justice, can be admin- 
istered smoothly, and will yield a large and regular revenue. A 
tax, moreover, must be considered not by itself alone, but in 
connection with the nature and effects of other taxes imposed 
side by side with it. The proposed tax, in combination with 
the other changes we recommend,^ seems to us not only to be 
greatly better than what we now have, but to promise better 
results than any other available method. 

^ The other changes recommended were as follows : 

" I. An inheritance tax, levied with respect to realty as well as to personalty, at 
the rate of 5 per cent, with an exemption for estates not exceeding $10,000 and 
an abatement of ^5000 on estates between $10,000 and $25,000. The revenue from 



588 SELECTED READINGS IN PUBLIC FINANCE 

The tax begins at a very moderate rate (being levied only on 
excess of rental over $400), and it becomes heavier as the scale 
of dweUing accommodation rises. It may be true that for the 
very rich the scale of tax does not rise in proportion to the total 
income. But, on the other hand, the inheritance tax, as proposed 
by us, bears with its full weight on the rich, while it is subject to 
exemption and abatement for those of small or moderate means. 
We have recommended, under the inheritance tax, exemptions 
of estates of $10,000 and less, and abatements on estates up to 
$25,000, while estates exceeding $25,000 pay tax on their full 
value. Each of these taxes, the inheritance tax and the house- 
rentals tax, tends to supplement the other. 

The advantages of a tax on house rentals can be easily stated. 
It is clear, almost impossible of evasion, easy of administration, 
well fitted to yield a revenue for local uses, and certain to yield 
such a revenue. It is clear, because the rental value of a house 
is comparatively easy to ascertain. The tax is based on a part 
of a man's affairs which he publishes to all the world. It re- 
quires no inquisition and no inquiry into private matters ; it uses 
simply the evidence of a man's means which he already offers. 
We have provided that a taxpayer may either declare the value 
of the dwelling he occupies or leave it to be estimated by assess- 
ors; the matter being one which, in the majority of cases, can 
be so nearly estimated without declaration by the taxpayer that 
it is not very material whether he hands in a statement or does 
not. It cannot be evaded except by change in the style of liv- 
ing, which few people, if any, would undertake because of a 
moderate tax. We have endeavored to provide, in the bill sub- 
mitted, for the due assessment of persons dwelling in apartment 
houses and in hotels. We have provided also for the payment 

this tax to be distributed from the state treasury among the several cities and towns, 
one half in proportion to population, one half in proportion to assessed valuation. 

" 2. A tax on occupiers in proportion to house rentals, only the excess over ^400 
of rental being taxable. 

" 3. Abolition of the present taxes on intangible personalty, such as stocks, bonds, 
loans on mortgage, income ; the taxes recommended under i and 2 being relied on 
to yield at least as large a revenue as is now secured by the taxes to be abolished. 

"4, Assumption by the state treasury of county expenses. 

" 5. Appropriation by the state of the revenue from taxes on corporate excess, now 
distril)uted among the several cities and towns." Report, p. 120. — Ed. 



THE IMPOT PERSONNEL-MOBILIER 589 

of two taxes in respect of house rentals by those persons who 
are so well-to-do as to occupy for their own use two separate 
houses in the commonwealth ; for the bill provides that (except 
in case of mere change of residence) occupancy of any dwelling 
for a period of three months or more shall be ground for the 
collection of the tax. Hence those who have winter and summer 
houses will pay this tax in both localities in which they reside. 

It may be objected that the tax is on real estate, and is ad- 
ditional to the taxes already levied on real estate. As to the 
owner of a dwelling who occ-upies it for his own use, it is true 
that he will pay not only the present taxes on the real estate, 
but another tax based on the rental value of his house. But 
this additional tax is levied with respect to the income which he 
must have, if able to live in an expensive house. No one can 
own and occupy a house whose rental value is $600 or ^800 
or ^1000 a year, unless he has some considerable income from 
other sources ; and on that income he may be fairly called on 
to pay a tax, if it be not unduly heavy, and be proportioned in 
some approximate way to his income. So far as tenants of 
dwellings are concerned, the owners are called on to pay the 
direct tax on the real estate, and the tenants alone to pay the 
proposed tax on rental values. If, indeed, this second tax were 
so heavy as to cause tenants to avoid dwellings whose occupancy 
would subject them to it, and were to cause them to seek cheaper 
houses, it might indirectly affect the demand for houses, and so 
might affect their rentals. But the rate of tax, as proposed, is 
very low on houses of moderate rentals, and advances slowly 
on houses of higher price. We do not believe it would cause 
any appreciable shifting in the selection or tenancy of dwell- 
ings, for comfort or luxury in dwellings is highly valued by 
most men, and they will hardly modify their expenditure on it 
because of a moderate tax. We believe, therefore, that this tax 
would operate, as it is designed to operate, not as a tax on real 
estate, but as a tax on the incomes of those who are prosperous 
enough to dwell in comfort or in luxury. We may remark, also, 
that its financial yield would be an important addition to the 
revenue of the towns and cities in which it would be levied, and 
would operate, so far as this went, to make possible a reduction 
in the rate of direct taxation on real estate. 



590 SELECTED READINGS IN PUBLIC FINANCE 

This brings us to the financial aspects of the proposed tax, in 
which we find additional strong reasons for its adoption. It is 
obvious that it would be collected chiefly in the cities, in certain 
of the larger and more prosperous towns, and in some of the 
smaller towns whose climate and site cause them to be resorted 
to by persons of means. The agricultural towns would be 
almost wholly outside its scope. The strictly manufacturing 
cities and towns would be little affected. In the other cities, 
and in the towns affected by it, the tax would be collected solely 
from those able to live in comfort and luxury, and would be of 
considerable weight only on the well-to-do. In these places, 
also, it would be of financial importance. These are precisely 
the parts of the state which would lose financially from the re- 
adjustments proposed by us in connection with the inheritance 
tax. As we have already pointed out, these places would gain 
less from the distribution of the proceeds of the inheritance tax 
than they would lose by giving up the revenue now derived 
from the taxation of intangible personal property. This differ- 
ence would be more than made up, in most places, by the new 
revenue from the house-rentals tax. 

The revenue from this tax must be almost entirely a matter 
of estimate. There is hardly any basis on which to make any 
specific statement in figures. But we have made a rough calcu- 
lation as to one ward in Boston, that containing the Back Bay 
district, and we think it well within bounds to put the tax reve- 
nue in this single ward at about $300,000. For the whole, city 
of Boston we think $500,000 a low estimate of the proceeds. 
The financial loss of Boston from the rearrangements we have 
proposed elsewhere would be fully made up by this sum. New- 
ton and the town of Brookline would secure a large revenue ; 
the same would be the case in cities like Cambridge, Worcester, 
Springfield. Similarly, the summer resort towns, whose present 
gains from the taxes on intangible personalty would cease on 
the adoption of our proposals, would find some compensation in 
the revenue from the new tax. The introduction of this tax, 
in fact, would prevent any financial shock from the other impor- 
tant changes which have been proposed, and would enable the 
commonwealth to enter at once, without any pa'nful process of 
readjustment, on a new, and, as we believe, a better system 
of taxation. 



THE IMPOT PERSONNEL-MOBILIER 591 

In view of the imposition of this new tax based on presum- 
able income, we recommend the abolition of the present tax on 
incomes ''from profession, trade, or employment." We make 
this recommendation, not only because the retention of the 
existing tax side by side with that proposed must result in 
double taxation of the same object, but because the present tax 
has proved no less difficult of satisfactory administration than 
the other parts of the present method of taxing intangible 
personalty. As matters stand, the partial income tax which 
the statute imposes is assessed and collected in the most 
uncertain and unequal manner. Some persons in receipt of 
salaries that are well known are taxed unfailingly on such 
income, and this is especially the case with public officers, 
whose salaries (usually very moderate) are published in official 
documents. Many other persons, in receipt of larger salaries 
from corporations or from private employers, never hear of the 
income tax. Physicians and lawyers who earn incomes from 
their professions are taxed by guesswork, often not at all, very 
rarely with certainty and accuracy. The same is true of busi- 
ness men ; except that here, in the cases where the income tax 
is assessed and collected, it is additional to the taxes on the real 
estate, machinery, and stock in trade of the business carried on, 
and so is open, in part if not in whole, to the charge of double 
taxation. In fact, the difficulties which we have referred to 
elsewhere, when discussing the proposal for a general income 
tax, have appeared in full evidence with the existing income 
tax. On every ground, therefore, and especially in view of the 
proposed tax on house rentals, we recommend its abolition. 



CHAPTER XVI 

TAXES ON BUSINESS 

67. The French Business Tax. — Established in 1791 and re- 
ceiving practically its present form in 1844, the French busi- 
ness tax {impot des patentes) is one of the oldest taxes on 
business profits, and has served as a model for business taxes 
in many other countries. The following description of this 
tax is taken from a recent treatise : ^ 

The tax is defined by the law of 1880, as follows: "Every 
person, Frenchman or foreigner, who carries on in France any 
trade, industry, or profession, not expressly exempted by the 
law, shall be subject to the business tax." 

The tax, then, is general. The law aims to reach all profits 
from industry or profession without any exceptions other than 
those expressly granted. The omission of any occupation from 
the published tariff of charges is no reason for exemption ; in 
this case, an administrative ruling is made in order to reach 
a taxpayer who would otherwise escape. . . . 

The impot des patentes is composed of a "fixed" and a "pro- 
portional " duty. The purpose of the law in providing a pro- 
portional as well as a fixed duty was, on the one hand, to make 
a proper distinction between various occupations, and, upon the 
other, to proportion the tax to the profits realized by persons 
engaged in the same occupations. The fixed duty, therefore, 
seems to be a tax on the occupation, independently of the con- 
ditions under which it is carried on ; while the proportional duty 
IS designed to take account of these conditions. 

1 J. Caillaux, Les impots en France, I, 46 et seq. (Paris, 1904), 
592 



TAXES ON BUSINESS 593 

The Fixed Duty 

The occupations subject to the fixed duty are described in 
three schedules, A, B, and C, which are appended to the law. 

(i) Schedule A includes the general run of merchants and 
artisans. Merchants can be divided into three classes : those 
who sell principally to other merchants (marchands en gros\ 
those who sell both to retailers and to consumers {marchands en 
deini-gros\ and those who ordinarily sell only to consumers 
{marchands en detail). 

In this schedule the fixed duty is based upon the nature of the 
occupation and the population of the locality. The occupations 
are divided into eight classes, for each of which nine rates of 
duty are prescribed according to population. For example, in 
order to ascertain the fixed duty to be paid by a grocer in the 
city of Toulouse, it is necessary first to determine in what class 
his occupation belongs. He will be in the first class if he is a 
wholesale grocer ; in the second class, if he sells both to retailers 
and consumers ; and in the fifth class, if he is a retail dealer. 
Then, in the second place, it will be necessary to examine the 
rates of duty applying to the class in which the grocer belongs, 
and to select the one which corresponds to the population of 
Toulouse. 

(2) Schedule B applies to a certain number of occupations, 
such as bankers, proprietors of department stores, and water or 
omnibus companies. It was thought that the population of the 
locality was not the only element to be considered in graduating 
the rates for different persons in any one of these occupations ; 
and also that the occupations themselves could not be classified, 
as are those in Schedule A. Therefore a special charge was 
established for each of these occupations ; and an attempt was 
made to adjust the fixed duty according to profits, by breaking 
it into two parts in the majority of cases. The first part is a 
determinate charge {taxe determinee) which varies for the same 
occupation according to the population of the locality and, in 
exceptional cases, according to other circumstances. The second 
part is a charge based upon the number of persons employed in 
excess of five, and applies to most of the occupations in the 
schedule. In some cases, however, such as water, omnibus, and 



594 SELECTED READINGS IN PUBLIC FINANCE 

hack companies, there is no tax upon employees, but simply a 
special set of charges for these occupations. (The author then 
describes an amendment of 1893 relating to department stores. 
This amendment imposed rates which increase progressively 
according to the number of employees and the population of 
the city.) 

(3) Schedule C applies to industrial pursuits. It takes no 
account of the population of the locality where an establishment 
is situated, since this generally has little to do with the impor- 
tance of the enterprise. Here the fixed duty may be simply 
a determinate charge, a charge composed of variable elements, 
or a combination of the two. 

The determinate charge is uniform for all taxpayers in the 
same occupation. It is, for instance, five francs for all tile 
makers whatever the conditions may be under which they carry 
on their industry. 

The variable charge is intended to take account of the impor- 
tance of the establishment and to proportion the tax to the size 
of the plant. The law selects in such occupations whatever ap- 
pears to be the best index of the probable profits. Thus a brew- 
ery is taxed according to the capacity of its boilers ; a hat maker, 
according to the workmen he employs; a chocolate manufac- 
turer, according to the number of workmen and machines in his 
factory. ... 

The Proportional Duty 

The proportional duty is based on the rental value of both 
the dwelling house of the taxpayer and the premises used in the 
profession or industry. The rate of this duty is not uniform, and 
is regulated by the provisions of a fourth schedule, Schedule D. 
For persons included in Schedule A the rate of the proportional 
duty varies from 2 to 5 per cent of the rental value ; in 
Schedule B it is 10 per cent, with a few exceptions; in Sched- 
ule C it ranges from i| per cent to 10 per cent. Often 
the rental of a taxpayer's dwelling is taxed at a different 
rate than the rental of the premises occupied by his business 
establishment. The so-called " liberal " professions, such as 
those of the lawyer, doctor, and the like, pay only the propor- 
tional duty in Schedule D, and are exempt from the fixed duties. 



TAXES ON BUSINESS 595 

The rate of the proportional duty is generally 6| per cent of 
the rental value, but in exceptional cases it rises to 8^ per 
cent. 

This general scheme is sufficiently complex ; but in its 
practical application further complexities appear. Thus a per- 
son who carries on two or more branches of industry in separate 
establishments, pays a separate fixed duty upon each establish- 
ment. If, however, he carries on two or more occupations in 
the same establishment, some reduction is made, the mode of 
computation being peculiarly complex. Similar intricate adjust- 
ments are prescribed for the proportional duty under the cir- 
cumstances just described. Partnerships and corporations give 
rise to further complexities. The senior member of a partner- 
ship pays the entire fixed duty; while, in addition, the junior 
partners pay a fractional part of the duty proportioned to the 
number of members in the firm. The proportional duty is paid 
upon the residence of the senior partner and all the buildings 
occupied by the firm, but the dwellings of the junior members 
are exempt.^ Corporations pay merely the fixed duty for every 
establishment they own. There is also a complicated system of 
exemptions.^ 

Unlike most parts of the French direct-tax system, the impot 
des patejites is a rated, not an apportioned, tax. In 1901 its 
total yield was 211,000,000 francs, an increase of 46,000,000 
francs in twenty years. Of this sum 134,000,000 francs was 
raised for the national government, and 77,000,000 for the 
departments and communes. The relative importance of the 
four schedules is shown by the following figures which give 

1 The result is heavier taxation of partnerships. Leroy-Beaulieu says that a 
manufacturer with locxD employees in a certain branch of business would pay a tax 
of 10,266 francs if he carried on the business on his own account; whereas if he had 
two partners, the tax would rise to 15,336 francs. 

2 Government employees, artists, and teachers are exempt ; also farmers, whose 
profits are supposed to be reached by the land tax. 



596 SELECTED READINGS IN PUBLIC FINANCE 

the amount collected, under each schedule, of the principal 
of the tax in 1902 : 

Schedule A 55,473,000 francs. 

Schedule B 10,117,000 francs. 

Schedule C 19,961,000 francs. 

Schedule D 3,908,000 francs. 

Thus the bulk of the tax is collected from the merchants and 
shopkeepers, large and small, who are included in Schedule A.^ 
The theory upon which the impot des patentes is constructed 
is the same as that which underlies the impot personnel-mobilier. 
Concerning it, Leroy-Beaulieu says : ^ 

In taxing the profits of industry and commerce we have but 
three methods of procedure : (i) the government can under- 
take inquisitorial inspections of books and documents of the 
taxpayers ; (2) the taxpayers may be required to declare their 
profits, under oath; and (3) we can use external signs, indicia 
more or less vague, which allow us to value approximately, not 
the profits of any particular establishment, but those of each 
category of merchants. 

Each method has grave faults. In France, a somewhat un- 
stable democracy where every one is afraid of arousing public 
envy, the people are very unwilling to allow tax officials to be- 
come conversant with their personal affairs. It is feared that, if 
the officials take a single step across the threshold, they will 
soon wish to take ten ; and it seems preferable to keep them 
outside the house rather than to contend later to fix a limit to 
official intervention and control. The maxim "■ principiis obsta " 
is universally approved in this matter. 

The second method, that of taxpayers' declarations, may be 
criticised on different grounds. No society is composed wholly 
of men who are invariably honest ; and, when declarations are 
employed, there are too many temptations to fraud. Doubtless 

1 The principal of the tax is subject to additions both for national and local pur- 
poses. These additions, made on a percentage basis, bring the total yield up to the 
figures given above. 

2 Of the eight classes of taxpayers in this schedule, the fourth, fifth, and sixth- 
representing establishments of moderate size, pay over three fifths of the tax. 

2 Traite de la science des finances, Pt. I, Bk. II, ch. 8. 



TAXES ON BUSINESS 597 

this evil can be reduced by vigorous administrative control and 
shrewd inquiry by the tax officials ; but then we fall back into 
the evils of the previous method. Even admitting, what one 
must be very skeptical to deny, that dishonesty is the exception, 
nevertheless the use of declarations has the fault of subjecting 
the most honest men to the suspicion of bad faith and evasion. 

We do not say that these inconveniences of the two methods 
just discussed are not offset by numerous advantages ; but the 
people of France have been less impressed by the advantages 
than the disadvantages of these methods. It is necessary, there- 
fore, in this state of popular opinion, to adhere to a system 
of taxation according to legal presumption, to certain external 
indicia, which put the taxgatherers on the track, not of the 
profits actually realized by the taxpayer, but the possible or 
probable profits. This system is, by its very nature, defective ; 
it can be improved, but can never be perfect. One of its chief 
defects is that it can throw no light upon the profits of each in- 
dividual trader ; its basis is, in fact, the assumed average profit 
which each class of traders can reasonably make under given 
conditions of business. Thus, in this system, cases of injustice 
to individual taxpayers will always be numerous ; and every proj- 
ect for improvement will confine itself to providing that no 
branch of industry shall be favored at the expense of another. 

From 1 79 1 to the present day there has been a constant 
effort to make the i7npdt des patentes more nearly proportioned 
to the profits of the taxpayer. The more just our legislation 
has tried to be, the more complicated it has become. It is by 
making new distinctions, adopting new and more numerous 
indicia, that the law has succeeded in eliminating some of the 
crying injustices in the assessment of the business tax. 

******* 

This tax is assessed in France according to the four principles 
that follow : 

I. Profits are not the same for all industries. There are 
various industrial and commercial pursuits which, on their very 
face, differ greatly from one another in respect of their probable 
profits. Thus, it is fair to presume that a banker makes larger 
profits than a joiner, and that a grocer makes more than a cob- 
bler. This is a presumption which is reasonable and justifies the 



598 SELECTED READINGS IN PUBLIC FINANCE 

classification of industries according to their assumed impor- 
tance. 

2. For commercial enterprises of the same class the profits 
ordinarily are in some proportion to population of the locality 
where the trade is carried on. A grocer in Rouen has a better 
chance to make money than one in Yvetot ; and the latter has 
a better chance than a grocer in a small village. This presump- 
tion, too, is not unreasonable so far as retail trade is concerned ; 
but it is totally invalid in the case of manufacturing establish- 
ments. Therefore the law does not employ it in the latter case. 

3. The profits of a manufacturer or merchant maintain 
usually a certain proportion to the size of the premises occupied, 
the number of machines used, and the number of employees. 
Thus a spinner operating a factory with one hundred thousand 
spindles has a prospect of larger profits than a competitor with 
an establishment having ten thousand spindles. A grocer with 
large stores can be presumed to have a better chance to make 
money than one who occupies a small store. A dealer in 
notions who has one hundred employees has a better chance 
than one who employs but ten persons. This presumption is 
not unreasonable ; it is almost the only one applicable to large 
industries. 

4. Business profits often stand in a certain relation to the 
dwelling that a person occupies ; since the larger they are, the 
better the house that the recipient will occupy. This presump- 
tion, while not false, is the least accurate of the four. A man's 
dwelling may be an indication, rather, of the fortune he has pre- 
viously acquired, of his personal tastes, or of the size of his 
family. Then, too, it can be said that, since a business man has 
already paid the mobilier, it is clearly unjust to tax him again 
upon his dwelling. 

However the matter may stand, these four presumptions give 
rise to an extremely complicated system of taxes which are 
often faulty in particular cases ; but, nevertheless, the best that 
can be invented if it is proposed to tax the business profits 
without resorting to declarations of the taxpayer or inquisitorial 
investigations by the taxgatherers. It is necessary, besides, 
never to lose sight of the fact, already mentioned, that the busi- 
ness tax does not attempt to tax profits actually realized so 



TAXES ON BUSINESS 599 

much as the profits that can be reasonably expected under the 
given conditions. If these average, or probable, profits are not 
actually realized by the taxpayer, the treasury does not reduce its 
demands ; if, on the other hand, they are exceeded, the demands 
of the treasury do not increase. 

68. The Prussian Business Tax. — Prior to reforms effected in 
1 89 1 the Prussian business tax {Gewerbesteiir) was modeled more 
or less after the French tax. Industries were divided into 
eleven classes, and the rate of the tax was graduated according 
to the size of the city or locality in which the business was 
carried on. The Prussian tax differed from the French model, 
however, in important particulars. In the first place, instead of 
fixing a hard and fast rate for each class of industries, the law 
levied an average rate upon all establishments of the same class 
located in the same locality, thereby leaving much to the dis- 
cretion of the assessors. This average rate multiplied by the 
number of business enterprises gave the total amount to be 
collected from the persons in any given trade or occupation in 
any locality. Then for the purpose of dividing this quota 
among the different establishments to be assessed in each 
locality the law provided that the taxpayers of each indus- 
try should elect assessors from their own numbers. Such 
assessors^ presumably, would be acquainted with the general con- 
dition of each taxpayer's business, and would be able to effect a 
just distribution of the tax, within the restrictions imposed by 
the law.i 

In 1 89 1, however, the Prussian tax was radically changed in 
many of its principal features, thereby losing all resemblance to 
the French business tax. These changes have been described 
by Dr. J. A. Hill, as follows : 2 

1 The law provided, for instance, that no one should pay less than half the aver- 
age rate for the class. This prevented disproportionate assessment of the large 
establishments. 

2 Quarterly Jour7tal of Economics y Vol. VIII, pp. 82-92. Reprinted with con- 
sent of the author. 



60Q SELECTED READINGS IN PUBLIC FINANCE 

Such were the main features of the Prussian business tax 
previous to 1891. The law of that year introduced important 
changes. The old classification of industries has been aban- 
doned, and the population of the place in which the business is 
located is now no longer taken into account in regulating the tax. 

The basis of the new classification is for all kinds of business 
alike, either the annual earnings or the capital. There are four 
classes {cf. Gesetz von Jtmi 24, 1891, § 6): the first includes 
business or industrial undertakings which either yield annual 
earnings amounting to not less than 50,000 marks, or employ a 
capital (fixed and circulating) of not less than 1,000,000 marks ; 
in the second class may be rated those businesses with annual 
earnings from 20,000 to 50,000 marks, or with a capital from 
150,000 to 1,000,000 marks; in the third, those with earnings 
from 4000 to 20,000 marks, or with capital from 30,000 to 150,- 
000 marks ; and in the fourth, those with earnings from 1500 to 
4000 marks, or with capital from 3000 to 30,000 marks. Any 
business in which neither the earnings amount to 1500 marks 
nor the capital to 3000 marks is exempt from the tax {Gesetz ^ 
§ 7). It was estimated that this limit would exempt about 300,000 
small business undertakings, or more than one third of the total 
number of businesses (865,940) assessed under the old law {cf. 
Einleittmg des Gesetzes). 

This double basis of classification may at first seem somewhat 
confusing, or even inconsistent with the plain rule of logic that 
a division must be founded on one principle or basis. But a 
further study of the law shows how the two bases are to be 
employed so as to avoid difficulty. Each business is classified 
on the basis of either its earnings or its capital. When it 
belongs in one class on the first basis and in another on the 
second, the tax officials have, with certain exceptions which we 
shall mention presently, practically the option of rating it in 
either class. Of course, having regard to fiscal considerations 
only, it would be natural to rate the business in the higher 
class, where it would yield considerably more to the public 
revenues than in the lower. Accordingly, the intention is 
that in general earnings shall be employed as the principal 
basis of classification ; but it is deemed practically advanta- 
geous to use capital as a secondary or alternative basis, because 



TAXES ON BUSINESS 6oi 

there are cases in which it is especially difficult to estimate the 
earnings, — as when a business is newly established or where it 
is carried on principally in foreign countries, although having its 
location or some one factory in Prussia. Furthermore, it is 
urged that this use of two bases meets with favor in business 
circles, where occasions for dissatisfaction would often arise if a 
business were transferred to a lower class or perhaps exempted 
from the tax altogether, simply because, owing to some special 
combination of circumstances {Konjimctur) or to some single 
error of management, its earnings had temporarily fallen below 
the limit of the class in which it had hitherto been rated {Ein- 
leitiuig des Gesetzes). 

But, whichever basis of classification may be employed, the 
tax for each class, as we shall see, is graded with reference to 
the estimated earnings. It is apparently meant to be a tax on 
profits rather than capital. Therefore, if a business is correctly 
classified on the earnings basis, the fact that it may belong in a 
lower class on the basis of capital does not show that the tax on 
it is disproportionately high. That fact simply means that the 
business derives, relatively, large earnings from small capital, or, 
m other words, is unusually profitable, and may be taxed accord- 
ingly. The law allows no appeal from the classification in such 
cases as this. 

The case is otherwise when the business is correctly classified 
on the basis of capital, but on the basis of earnings belongs 
in a lower class. Here the tax may prove to be higher in 
proportion to the earnings than was intended ; and the law has 
taken such cases into consideration by providing that any busi- 
ness, even when correctly classified on the basis of capital, must 
be transferred to the next lower class on proof that for two 
years in succession the earnings have not amounted to 30,000 
marks in Class I, 15,000 marks in Class II, or 3000 in 
Class III {Gesetz § 8). These amounts, then, represent 
the minimum limit of permanent earnings for these three 
classes respectively. Whatever the capital may be, the business 
cannot be retained in the class in question unless the earnings 
come up to this limit. The limit, it will be observed, is consid- 
erably below that which is adopted for the classification on the 
earnings basis. On that basis no business can be classified in 



602 SELECTED READINGS IN PUBLIC FINANCE 

Class I, for instance, unless its earnings amount to 50,000 
marks. If, however, its capital amounts to 1,000,000 marks, it 
may be classified on the basis of capital, and retained in Class I 
so long as its earnings amount to 30,000 marks. It does not 
follow, however, that, because under these conditions the busi- 
ness is retained in Class I, it must pay as high a tax as it would 
if its earnings were sufficient to rate it in that class, or that it 
must pay a higher tax than it would if, on the basis of earnings, 
it were transferred to Class II. This will be apparent when 
we come to consider the scale of rates. 

There are no provisions corresponding to the above in case of 
Class IV, the lowest class. Therefore, no business with a cap- 
ital of 3000 marks is exempt from the tax, however small its 
earnings may be ; but under the scale of rates in that class the 
tax may readily be adjusted to cases in which the earnings are 
unusually low in proportion to the capital. 

In determining what constitutes earnings or capital, the tax 
officials have to rely mainly on their own personal knowledge 
and judgment. But a few^ general principles are laid down in 
the law. The costs of the business are to be deducted from the 
gross receipts, and a proper allowance made for depreciation or 
loss in value ( Werthverminderung)} and for the loss incurred 
by discarding machinery or other equipments of the business. 
But the interest on capital, whether borrowed or not, and on 
debts cannot be deducted. Neither can expenditures for the 
improvement or extension of the business, nor for the living 
expenses of the owner and those dependent on him. Fixed 
and circulating capital is briefly defined as comprising all the 
value permanently devoted to the prosecution of the business 
{Gesetz, §§ 22, 23). 

The method of assessing the tax by means of a medium or 
average rate has, as we have said, been retained in the new law : 
it does not, however, apply to Class I. There its adoption was 
considered impracticable, owing to the wide differences in the 
earnings and capital of businesses rated in this class. There- 
fore, each business is assessed separately and independently. 

1 This, it seems, includes loss occasioned by wear and tear {Abnutzung) of the 
buildings and equipments and any depreciation in the value of wares or of the out- 
standing claims of the business, etc. 



TAXES ON BUSINESS 603 

The tax is graded so as to collect approximately i per cent of 
the earnings. Thus, when the earnings are from 50,000 marks 
to 54,800 marks, the tax is 524 marks ; and it increases 48 marks 
for every increase of 4800 marks in the earnings. In this 
class, then, the tax is simply a graded tax on earnings assessed 
directly on each business. The assessment districts are the 
provinces and the city of Berlin ; and, of the assessors for each 
district, two thirds are chosen by the committee of the province 
(Provinzialausschuss), and one third are nominated by the Min- 
ister of Finance {Gesets, §§ 9j io)- 

For the other three classes average rates are prescribed : for 
Class II, 300 marks; for Class III, 80 marks; and for Class 
IV, 16 marks. This rate is the average tax to be collected from 
the taxpayers in any given assessment district. The assess- 
ment district for Class II is the Regierungsbezirk ; for Classes 
III and IV, the Kreis. The taxpayers rated in the same class 
and district constitute a tax association {Steuergesellschaft), on 
which the total tax for that class in that district is assessed 
{Gesetz, § 13). This total is, of course, the product obtained by 
multiplying the number of business undertakings represented in 
the association by the average rate for the class in which it 
belongs. If, for instance, in a given district there are 100 busi- 
nesses rated in Class III, the total tax in that association will 
be (80 X 100=) 8000 marks. The distribution of this total 
among the individual taxpayers is intrusted to a tax committee, 
the Steueratisschuss, the members of which are elected by the 
association from its own members. But the chairman is a 
commissioner of the government appointed to represent the 
interests of the state (§§ 15, 25). In the election of the com- 
mittee the suffrage is limited to one vote for each business taxed. 
The size of the business is, therefore, not taken into considera- 
tion ; and, where there are several proprietors, only one of them 
can vote. In this way it is hoped to secure assessors who 
possess the confidence of the taxpayers, have a practical ac- 
quaintance with the local business conditions, and will dis- 
tribute the tax equitably and satisfactorily. This feature of 
the law is not new. It was adopted when the business tax was 
introduced in 1820, and in its workings is said to have given 
general satisfaction. 



604 SELECTED READINGS IN PUBLIC FINANCE 

In assessing any individual business, the committee is limited 
to a choice among the optional rates prescribed in the law for 
each class. In Class III, for instance, there are i8 such rates, 
ranging from a minimum of 32 marks to a maximum of 192 
marks {Gesetz, § 14). Moreover, the rate selected in any case 
may not exceed i per cent of the earnings of the business 
taxed. This rule, however, does not apply to a business rated 
on the basis of capital when on the basis of earnings it belongs 
in a lower class {Gesetz, § 15, 2). Acting under these limita- 
tions, the committee is to distribute the tax according to their 
knowledge or estimation of the amount of the earnings. 

In this intention to collect about i per cent of the earnings,^ 
and in most cases not more, is found the explanation of the 
scale of rates which is given below. The maximum rate in each 
class is nearly i per cent of the maximum earnings in the earn- 
ings scale of classification ; and the minimum rate, although 
considerably less than i per cent of the minimum earnings in 
that scale, is but little more than i per cent of the minimum 
earnings which a business might yield, and still be retained in 
the class in question on the basis of its capital.^ The conse- 
quence is that the rates for the different classes overlap ; that 
is, the minimum rate for each class is less than the maximum 
rate for the next lower class. This allows a considerate treat- 
ment of businesses which are rated in a given class on the basis 
of capital, but which, as regards earnings, belong in the next 
lower class. The arrangement is an ingenious one, and has 
some results which are worth noting. 

1 In studying the Prussian business tax, and most of the other taxes levied by 
European countries upon business or property invested in business, the American 
student should observe particularly the moderate rates of taxation which are imposed. 
He should contrast, for instance, the Prussian tax of I per cent of the presumed 
income with the American property taxes of 12, 15, and even 20 dollars in the 
thousand of the capital value of factory buildings, machinery, stocks of goods, and 
the like. A tax of 15 dollars on every 1000 dollars of capital invested in a business 
is, if the earnings are 6 per cent, — or 60 dollars per 1 000, — equivalent to an 
income tax of 25 per cent. Undervaluation of the property may reduce the tax, and 
usually does so ; but if the property is assessed for 50 per cent of its true value, the 
tax of 15 dollars is 12^ per cent of the income. — Ed. 

2 In Class IV there is, as we have remarked, no such minimum limit for the 
earnings. But the low minimum rate, 4 marks, makes it possible to keep the tax 
below I per cent until the earnings fall below 400 marks. 



TAXES ON BUSINESS 



605 



Earnings 

from 1 500 to 4000 marks, 
or 
Capital 

from 3000 to 30,000 marks, 



Earnings 

from 4000 to 20,000 marks, 
or 
Capital 

from 30,000 to 150,000 marks, 
and earnings not less than 
3000 marks, 



Earnings 
from 20,000 to 50,000 marks, 
or 
Capital 

from 150,000 to 1,000,000 
marks, and earnings not 
less than 15,000 marks, 



Earnings 

not less than 50,000 marks, 
or 
Capital 

not less than 1,000,000 marks, 
and earnings not less than 
30,000 marks, 



= IV 



^ = 111 



= 11 



Rates 

4 

8 

12 

16 = average tax for IV. 

20 

24 

28 

32 

36 

40 

48 

56 

64 

72 

80 = average tax for III. 

S8 

96 
108 
120 
132 
144 
156 
168 
180 
192 
228 
264 
300 = average tax for II. 

33^ 

372 
408 

444 
480 



524 on 50,000-54,800 earnings. 
572 on 54,800-59,600 " 
620 on 59,600-64,400 " 
Etc. Etc. 



In the first place, it is obvious that the transfer of any given 
business from one class to the next lower need not necessarily 
reduce the tax it has to pay ; and conversely, of course, its 
transfer to a higher class need not raise the tax. For instance, 
a business with a capital of 150,000 marks, and earnings 



6o6 SELECTED READINGS IN PUBLIC FINANCE 

amounting to 18,000 marks, might either be rated in Class II 
on the basis of capital or in Class III on the basis of earnings, 
without making any difference in the tax the owner is called 
upon to pay. For m either -class he may be assessed 156, 168, 
180, or 192 marks. In that case, it might well be a matter of 
indifference to him in which class he was rated; but in the 
yield of the tax to the public treasury it would make a very 
important difference. For, if the business is retained in Class 
II, it yields the average rate for that class, — namely, 300 
marks, — which has to be raised by the association in which the 
business is taxed. If, however, it is transferred to Class III, 
it will only yield 80 marks, the average rate for that class. It 
is obviously for the interests of the treasury to have this busi- 
ness retained in Class II. Its transfer to Class III means a 
loss of 220 marks ; and yet the owner of the business may, as 
we have seen, have no special inducement to protest against his 
retention in Class IL That is not the case, however, with the 
association to which he belongs ; for it pays over to the public 
treasury 300 marks on his account, while it receives from him 
only 180 marks. It would therefore gain 120 marks if this tax- 
payer were transferred to Class III ; and in that class he will 
be welcomed, for he adds but 80 marks to the total tax of the 
association, to which he contributes 180 marks. 

The arrangement has this advantage, as it seems to me : It 
allows the taxpayer who is on the border line between two 
classes to pursue his own business affairs without giving himself 
much concern as to which class he is rated in. He can leave 
that question to be decided by the representatives of the asso- 
ciations interested and the government officials. In making the 
classification, the friction must come principally at this point. 
The fiscal interests of the state demand that the business should 
be classified in the higher class, those of the two associations 
that it should be classified in the lower. It is not the state 
versus the individual taxpayer, but the state versus a group of 
taxpayers, or their representatives, no one of whom has any 
special reason to be more interested in the decision than an- 
other. It is the classification which determines definitely the 
amount which the state is to receive from the tax and the amount 
vvhich each association — not each individual taxpayer — is to 



TAXES ON BUSINESS 607 

contribute. After the classification is settled, therefore, any 
further conflict of interests is between the members of the same 
association, each of whom will of course find it for his advan- 
tage to see that he does not pay more than his share of the total 
tax of the association, or, what is the same thing, to see that 
other members do not pay less than theirs. 

It follows that, so far as the returns from the tax are con- 
cerned, it is only necessary to ascertain the earnings or capital 
of a business within rather wide limits, — namely , the limits 
which determine the classification, — and the taxpayer may be 
called upon to state where within these Hmits his business be- 
longs {Gesetz, § 55); but any more definite statements as to 
his earnings or capital cannot be required of him. He may, 
however, be required to state in what business or businesses he 
is engaged, where they are located, the number and kind of 
workmen employed, the nature and quantity of machinery in 
use, including the motive power of the works, or to answer any 
other questions in regard to the outward indications of the 
extent of his business {Gesetz, § 54). The chairman of the tax 
committee, moreover, has the right to inspect any place of 
business or manufacture during working hours (§ 25). But the 
books of the business cannot be examined without the owner's 
consent (§ 27), and the assessors are bound by oath to keep 
secret all information obtained in the exercise of their office 

(§ 49> 

It must not, however, be forgotten that in the assessment of 
the income tax the written declaration is required. These dec- 
larations can hardly fail to be of great assistance in the assess- 
ment of the business tax. In many cases, the personal income 
of the taxpayer will be identical with the earnings derived from 
the business in which he is engaged ; and the Introduction to 
the business tax law calls attention to the urgent desirability of 
selecting for chairman of the tax committee the. chairman of the 
income tax assessment commission for the same district, "on 
account of the substantial identity of the materials used in 
ascertaining industrial income and business earnings." ^ 

1 By a law of 1893 this tax was made a local tax. Its yield at a comparatively 
recent date was 20,ocx),cx)0 marks. — Ed. 



6o8 SELECTED READINGS IN PUBLIC FINANCE 

69. License Taxes in Massachusetts. — Apart from the gen- 
eral property tax, which, of course, reaches capital, the common 
form of business taxation in the United States is the license tax. 
Many states and probably all municipalities impose license taxes 
upon various occupations. ^ Except in the South, the state taxes 
are confined largely to licenses for the sale of liquors ; the South- 
ern states, however, have a most extensive system of license 
taxes. Municipal licenses generally cover a wider range of 
occupations than the state taxes, and in Southern cities are 
frequently oppressive. 

Confining our attention to the license taxes imposed by the 
states, we may consider first the case of Massachusetts : ^ 

The commonwealth imposes a tax upon the privilege of sell- 
ing spirituous and malt liquors within the commonwealth. 
Every person desiring to engage in such business must first 
obtain a license from the authorities of the city or town in which 
he desires to do business, and pay the license fee imposed. 
The amount thus collected is divided between the common- 
wealth and the city or town in which the license has been 
granted, the city or town receiving three fourths and the com- 
monwealth the remaining one fourth of the receipts. 

A statute of the year 1888 limited the number of licensed 
places in any city or town which votes to grant licenses, to one 
licensed place for every thousand persons of the population of 
the city or town, as enumerated in the last preceding state or 
national census. There are some exceptions to this general 
rule. The most important is that for the city of Boston, which is 
allowed to have one license for every five hundred persons of the 
population. Certain minor exceptions are also made in favor 
of summer resorts having no settled population the year round. 
Every town, however small, is entitled to grant one license. 

^ ^ ^ ^ ¥^ ^ '^ 

The licenses are of six sorts. With the exception of the sixth 
class, which is distinguished by the person to whom the license 

1 For an account of license taxes, see Ely, Taxation in American States and Cities, 
203-209. 2 Yrom the Report of the Commission on Taxation, 1897, PP* 26-27. 



TAXES ON BUSINESS 609 

is granted, the classification is based on two grounds of distinc- 
tion ; namely, (i) whether the liquor is to be drunk on the 
premises or not, and (2) on the sort of liquor to be soldo The 
classification in the statutes is as follows : ■ 

First Class. — To sell liquors of any kind, to be drunk on the premises. 

Second Class. — To sell malt liquors, cider, and light wines, containing not 
more than fifteen per cent of alcohol, to be drunk on the premises. 

Third Class. — To sell malt liquors and cider, to be drunk on the premises. 

Fourth Class. — To sell liquors of any kind, not to be drunk on the premises. 

Fifth Class. — To sell malt liquors, cider, and light wines, containing not 
more than fifteen per cent of alcohol, not to be drunk on the premises. 

Sixth Class. — To druggists and apothecaries, to sell liquors of any kind for 
medicinal, mechanical, and chemical purposes only, and to such persons only 
as may certify in writing for what use they want it. 

The license fee varies for the different classes. A statute of 
1888 fixed the minimum fee to be charged by cities and towns 
at the following figures; for a license of the first class, ^1000; 
for a license of the second class, ^250; for a license of the third 
class, ^250; for a license of the fourth class, ^300; for a license 
of the fifth class, ^150; for a druggist's license, ^i. A city or 
town may charge as much more than these minimum fees as it 
may deem proper. 

The following figures show the yield of the tax to the com- 
monwealth, which is one quarter of the total yield, for a series 
of years : 

1890 ^426,309.62 1894 ^544,292.50 

1891 543,117.85 1895 682,099.36 

1892 504,979.81 1896 669,602.17 1 

1893 485,385-56 

70. License Taxes in Maryland. — ^ Professor T. S. Adams 
gives the following account of license taxes in Maryland : ^ 

^ Since 1896 the revenue has been as follows : 

1897 ^780,977 1901 $811,683 

1B98 770.524 1902 843,146 

1899 . 733.467 1903 775.665 

1900 805,191 1904 802,294 — Ed. 

2 Studies in State Taxation, edited by J. H. Hollander. Johns Hopkins University 
Studies in Historical and Political Science, Series XVIH. Reprinted by consent of 
editor, author, and publisher. 



6io SELECTED READINGS IN PUBLIC FINANCE 

Licenses in Maryland date from an early period, although 
the most important were first levied in the second decade of this 
century. In 1780 the marriage license was imposed, and an 
annual tax oi £iS upon billiard tables was levied in the same year. 
In 1 8 19 the broker's license was introduced in the form of a tax 
of ;^500 per annum on every broker dealing in bank notes or 
lottery tickets. The trader's license, auctioneer's license, and 
ordinary's license date from 1827. From this time until about 
twenty-five years ago the state derived its principal revenue 
from this source. During the twenty-two years, 1877- 1898, the 
various licenses yielded about 33 per cent of the total tax 
receipts. 

Forms of license taxes. — Besides the quasi-license taxes to be 
treated with the corporation taxes, the following license taxes 
are imposed in Maryland: 

1. Auctioneers in Baltimore city pay ^450 to $7^0, accord- 
ing to the amount of sales. In the counties, auctioneers pay 
the trader's license upon the value of the stock on hand. Re- 
ceipts in 1898, 1^3822. 

2. Brokers pay special charges ranging from ^100 for ex- 
change, insurance, and pawnbrokers, to $18.75 for grain, coffee, 
cotton, and sugar brokers. Receipts in 1898, $18,952.65. 

3. Hawkers and peddlers pay from $100 to $200 for each 
county in which they sell, according as they travel on foot or 
with horse and wagon. In eleven counties they pay $300 when 
they travel with a wagon and two horses. Receipts in 1898, 

$3012.91- 

4. Traders' licenses vary from $12 paid on a stock of $1000 
or less, to $150 paid on a stock worth $40,000 or more. Re- 
ceipts, in 1898, $188,879.44. 

5. Billiard tables. The annual license tax on billiard tables 
rented or conducted for a profit is $50. Receipts in 1898, 
$5604.27. 

6. Liquor dealers selling in quantities of more than one 
pint pay licenses varying from $18 on a stock worth less than 
$500, to $150 on a stock worth more than $30,000. Dealers 
taking out an $18 license must pay in addition the trader's 
license of $12. Receipts in 1898, $10,696.88. 

7. Ordinary keepers pay from $25, where the hoifse occupied 



TAXES ON BUSINESS 6il 

has a rental value of ;^ioo per annum or less, up to ^450, where 
the house has a rental value of ;^ 10,000 or more. Receipts in 
1898, ^11,877.89. 

8. Saloons and oyster houses in the counties pay ;^50 per 
year. Receipts in 1898, ^33,044.44. 

9. High liquor license. In Baltimore city and Ellicott 
city all liquor dealers, saloon keepers, etc., pay an annual license 
of ^250. Receipts in 1898, ;^546,88o.i4. 

10. Oyster dredger's license. Owners of boats engaged in 
dredging oysters pay ^3 per ton annually. Receipts in 1898, 

fe5,69375. 

11. Oyster tongers pay from $2 to ^5 a year, according to 
length of boat. Receipts in 1898, $12,925.24. 

12. Oyster canners pay one tenth of one cent upon every 
bushel of oysters shucked. Receipts in 1898, $4853.92. 

13. Oyster measurers pay ten cents per 100 bushels meas- 
ured. Receipts in 1898, $909.20. 

14. Net fishing. Three cents for each square fathom of 
seine, and one cent for each square fathom of gill net. Receipts 
in 1898, $204.85. 

15. Commercial fertilizers. Every manufacturer or importer 
of fertilizers is required to pay $5 for the first 100 tons sold, and 
$2 for each additional 100 tons. Receipts in 1898, $9150. 

16. Exhibition licenses. Theatrical companies, shows, cir- 
cuses, etc., pay in addition to local licenses, $30 per year, or $1 
per exhibition, in the counties* In Baltimore city theatrical 
exhibitions and circuses pay to the state $3 each night; other 
exhibitors, $10 per week. Receipts in 1898, $3347.71. 

17. Cigarette license. To sell paper-wrapper cigarettes 
dealers are required to pay a special license of $10 per year. 
Receipts in 1898, $11,160.20. 

18. Race and fishery. To sell liquor at horse races and 
fisheries, special licenses are issued which cost $4.50 and $6.50 
respectively. Receipts in 1898, $41.80. 

Critical suggestions. — Judged by McCulloch's empirical 
standard, the license taxes are the best taxes we have. They 
are easily and cheaply collected, very productive, and cause little 
irritation or complaint. Considering how completely the faculty 
or quid pro quo theory fails to explain some of our most satis- 



6i2 SELECTED READINGS IN PUBLIC FINANCE 

factory taxes (as, for example, the inheritance tax), there seems 
no reason why we should advocate the abandonment of license 
taxes because they have no apparent philosophical basis. Many 
of these licenses, notably the high Hquor, cigarette, and exhibi- 
tion Hcenses, are sumptuary measures. The first of these has had 
a most beneficial influence in Baltimore, and there seems little 
reason why we should not regulate by taxation if the measure 
of regulation desired by the public can be thus secured. The 
traders' licenses are not excessive and it is improbable that prices 
are appreciably affected by them. If the number of such fixed 
charges could be increased without causing more injustice or 
irritation than the average license of the present, the increase 
would SQQm,/?ro tanto, a most desirable substitute for the prop- 
erty tax. 

Many of the licenses are specially devoted to the interests of 
the particular branch of trade from which they are drawn. Thus, 
most of the oyster licenses are imposed for the sole purpose of 
maintaining the supremacy of Maryland in the oyster trade. 
The same motive explains the fertilizer license. Baltimore is 
now the largest manufacturing center of the fertilizer industry 
in the country. In order to keep the standard of these goods 
high this license is imposed and the proceeds devoted to the 
maintenance of a chemical laboratory where the inspection and 
analysis of fertilizers is constantly going on. 

In glaring contrast to most of the licenses are those required 
of peddlers and auctioneers in Baltfmore. The latter occupation 
is a virtual monopoly in Baltimore, only eight licenses being 
issued in 1898. The law provides that auctioneers shall be 
appointed by the governor and shall pay $4SO per annum if 
their sales — excluding real estate and houses — are less than 
^150,000. Where such sales amount to more than ;^ 150,000, 
the license costs $750. Whether this tax meets the approval of 
those who can afford to pay it, is not plain. But it certainly 
renders one legitimate vocation inaccessible to the poorer classes 
and undoubtedly diminishes the revenue that would accrue from 
this source if the licenses were of normal amount. 

The excessive license charge required of peddlers furnishes 
another instance of explicable but unjustifiable trade antipathy. 
Scarcely a session of the General Assembly passes without these 



TAXES ON BUSINESS 613 

charges being increased or extended over counties where formerly 
they did not apply. If auctioneers and peddlers thrive so well 
and it requires such an effort to repress them, it is only proof 
that they are performing some economic function better than 
the ordinary traders, and they should be encouraged, not dis- 
couraged. The excessive peddler's license is due in some de- 
gree to a survival of the Jew-baiting instinct. This charge is 
undoubtedly aimed at the industrious Jewish itinerant who ped- 
dles notions, since hawkers of fish and green provisions ar^ 
exempt. 

Licenses are granted by the clerks of the circuit courts. 
Sheriffs and constables are enjoined to make diligent search for 
violators of the law, and informants in every case are given one 
half of the penalty imposed. The law is generally well enforced 
and there are no wholesale evasions. Some of the penalties 
provided exhibit peculiar prejudices similar to those noted in the 
case of peddlers ; for example, a penalty of ^500 is imposed upon 
people doing a broker's business or keeping a public billiard 
table without a license, while the pecuniary penalty for selling 
liquor without a license varies from ^50 to ;$200. 

The more serious problem to be solved in connection with 
Hcenses is not whether they should be retained, but whether 
their proceeds should go to the state or the local division in which 
they are collected. The state retains one fourth of the proceeds 
of the high liquor license collected in Baltimore. It retains the 
entire proceeds of the traders' licenses collected in Baltimore — 
nearly $104,000 in 1898. Two questions are frequently asked 
by the citizens of Baltimore : Why should any of this money go 
to the state at all, and, if the state has a just claim to the pro- 
ceeds of license taxes, why should it take a part in the one case 
and the whole amount in the other ? 

The answer to the latter question is not difficult to find. The 
city of Baltimore, in so far as its liquor trade is concerned, is 
subjected to heavier taxation than other local districts. A por- 
tion of this taxation, about equivalent to the amount of taxes 
collected from liquor dealers in other parts of the state, is retained 
by the state in order to place Baltimore upon an equality with 
other local divisions in this respect. The justice of this appor- 
tionment must be acknowledged if it be decided that the state 



6 14 SELECTED READINGS IN PUBLIC FINANCE 

has a better claim to the proceeds of licenses than the several 
local divisions. 

The mayor of Baltimore has recently criticised the practice of 
using the traders' and other licenses for state purposes. The 
public expenses entailed by traders are borne by the city ; the 
logical fund for the payment of these expenses, he claims, is 
that derived from the licenses imposed upon traders. 

The question involved is clearly one of equity, to be decided 
by reference to the general principle in accordance with which 
license taxes are imposed. If licenses are paid in return for 
and in proportion to public services rendered, the proceeds, 
speaking generally, should go to the local districts in which they 
are collected. If they are payments for the grant of public 
privileges, the proceeds should go to the state. 

In origin, the license tax is closely akin to the modern fran- 
chise tax, and appears, in its historical aspect, as the price of the 
privilege to do business ; in Mississippi, for example, the tax is 
still known as the privilege-license tax. The grant of such 
privileges lies wholly within the province of the sovereign power ; 
it is not within the ordinary power of a municipal corporation 
either to authorize, prohibit, or circumscribe by license the pur- 
suit of a calling or trade not inimical to the public health, 
morals, or safety. In consequence of these facts, the payments 
for the grants mentioned should be retained by the power which 
conferred them ; and this power is the state. This interpreta- 
tion of the nature of the license tax is further supported by the 
difference in the burden imposed upon the several kinds of 
business. The broker and the peddler have no extensive stocks 
or establishments necessitating the maintenance of police and 
fire departments, yet they pay higher licenses than ordinary 
traders. Moreover, the license charges are substantially uniform 
throughout the state, irrespective of the degree of protection 
afforded by the various local governments. 

It is admitted that the above is an ultra-theoretical view of 
the nature of the license tax, but the distribution of taxation 
among individuals and the distribution of the proceeds of taxa- 
tion among the several governmental divisions are problems 
which are essentially theoretic. It is also admitted that there 
are many weighty arguments which may be adduced in support 



TAXES ON BUSINESS 615 

of the justice of the mayor's plea. But in the opinion of the 
writer, the distinctive features of the Hcense stamp it unmistak- 
ably as a state tax as distinguished from a municipal charge. 

71. License Taxes in Mississippi. — Even more inclusive is 
the system of license taxes of Mississippi and most other Southern 
states. Dr. C. H. Brough has written the following account of 
the Mississippi system : ^ 

Mississippi, in accord with the general practice of Southern 
commonwealths, imposes a privilege-license tax on well-nigh 
every occupation. An examination of the present revenue laws 
reveals the fact that there are one hundred and nineteen occupa- 
tions to which licenses must be issued as a condition precedent 
to the transaction of business. 

The importance of the privilege-license system in Mississippi is 
conspicuous. From the time when the dominant landed proprietors 
of an antebellum, regime demanded the taxation of other objects 
than their farms and estates, to the present day, when the need 
of revenue and a sentiment in behalf of local protection sustains 
what would seem to be a fiscal anachronism, the privilege-license 
system has been an important source of revenue. 

Of recent years the number of occupations subject to the 
payment of licenses has multiplied and the charges have in- 
creased. In the early laws we found the privilege schedule 
limited to auction sales, billiard tables, bowie knives, nine-pin 
alleys, peddlers, race horses or tracks, taverns, groceries, and 
theaters. An examination of this list shows that the articles 
specified are principally luxuries, the restricted consumption of 
which was deemed desirable. 

In striking contrast to this limited use of the privilege system 
is that implied in the revenue laws of 1898. Here the pre- 
dominance of the idea of revenue over regulation permits of no 
discrimination between necessary goods and luxuries, and between 
useful and useless occupations. Railroads and lawyers are 
placed on the same footing with merry-go-rounds and dealers in 

1 Studies in State Taxation, edited by J. H. Hollander. Johns Hopkins University 
Studies in Historical and Political Science, Series XVIII. Reprinted by consent of 
the editor, author, and publisher. 



6i6 SELECTED READINGS IN PUBLIC FINANCE 

hopfenweis. Bedspring dealers are as important in the eye of the 
law as boarding-house keepers. 

This enlargement of the scope of the privilege-license system 
indicates a gradual movement away from sole dependence upon 
the general property tax, a movement accelerated by the practi- 
cal defects of the latter and the need of applying a fiscal dif- 
ferential to the modern complex industrial organization. The 
rigidity of the state constitution has necessitated the taxation of 
corporations in the form of a privilege-license tax. That the tax- 
ation of corporations has taken definite form in the privilege- 
license system may be seen from the fact that railroad, express, 
sleeping-car, telephone, telegraph, and insurance companies 
are subject to the imposition of a privilege tax on those elements 
supposed to represent their taxable capacity. 

Accident insurance companies pay ;^25o per annum; life in- 
surance companies a graduated tax of $250 for the first year, 
$500 the second, $750 the third, and ;^iooo for the fourth year 
and thereafter. Insurance agents are also subject to a privilege 
tax, rated according to the size of the city or town where their 
business is transacted. Thus, an insurance agent doing busi- 
ness in a city of 5000 or more inhabitants, pays $40 ; in a city 
of more than 2000 and less than 5000 inhabitants, ^25 ; in a 
town or village of less than 2000 inhabitants, ^20 ; other insur- 
ance agents, ;^io. 

Express companies pay a privilege tax of ^500, together with 
a tax oi $1 for each mile of railroad along which they oper- 
ate, and a local property tax according to charter exemption 
and gross earnings. Railroads are divided into four classes 
according to gross earnings. The first class pays ^20 per mile ; 
the second, ^15 ; the third, ^10; and narrow gauge, $2. An in- 
teresting provision was inserted in the laws of 1898, whereby 
railroads claiming exemption from state supervision under maxi- 
mum and minimum provisions in their charter are compelled to 
pay an additional privilege tax of ;^io. Sleeping and palace car 
companies pay ;^200 each. Telegraph companies pay ^250 ; or 
if the line is less than 1000 miles, 25 cents per mile. Tele- 
phone exchanges are graded according to the number of sub- 
scribers. Thus, an exchange with 20 subscribers or less pays 
^5, while one with more than 150 subscribers pays $100. 



TAXES ON BUSINESS 617 

Other corporations following specified lines of business fare 
the same as insurance, transportation, and transmission com- 
panies, paying a privilege tax, either fixed or graduated, on some 
element of some taxable capacity. The element of taxable 
capacity varies greatly according to the nature of the business. 
On cotton gins the tax is fixed ; on cotton compresses it varies 
with baling capacity ; on cotton-seed oil mills, with the amount 
of capital stock. Auctioneers, barber shops, bicycle dealers, 
brokers, coal dealers, ferries, hotels, junk dealers, livery stables, 
meat markets, photograph galleries, restaurants, theaters, ware- 
houses, electric light, gas and water-supply companies, pay in 
proportion to the size of the city, town, or village in which they 
are located. Building and loan associations, fertilizer compa- 
nies, and stores pay in proportion to the value of their stock. 
Brickyards, ice factories, liquor dealers, lumber yards, and saw- 
mills pay in proportion to their output Billiard and pool tables, 
bottling establishments, breweries, bands of gypsies, circuses, 
cigarette dealers, dealers in deadly weapons, dentists, druggists, 
guarantee companies, hack lines, horse traders, lawyers, light- 
ning-rod agents, live-stock insurance companies, piano factories, 
second-hand clothiers, stave and spoke factories, pay a fixed 
amount. 

Peddlers and railroad eating houses furnish interesting excep- 
tions to the four bases of classification enumerated, i.e. location, 
value of stock, output, and fixed amount. Peddlers pay in pro- 
portion to their transportation facilities. Thus, a peddler with 
one horse or mule, and wagon, is taxed twice as much as a 
peddler on foot ; a peddler with two horses or mules, and wagon, 
twice as much again. Railroad eating houses pay in proportion 
to the number of daily trains making stops for meals. Where 
two or more passenger trains are running on trunk lines, the 
privilege tax is ^125 ; where there is only one such train, ^50. 

However variable may be the basis of assessment, the imposi- 
tion and collection of the privilege tax are comparatively simple. 
The law provides that insurance, telegraph, express and sleep- 
ing car companies, building and loan associations, and commer- 
cial agencies shall pay the tax directly to the state auditor. All 
other corporations and persons obtain their license from the 
county sheriff. In any case where it is inconvenient to obtain 



6i8 SELECTED READINGS IN PUBLIC FINANCE 

the license from the sheriff, it may be procured from the auditor. 
The auditor is required to prepare Hcense blanks and issue them 
to the sheriff of the county, who is held responsible for the col- 
lection. Privilege taxes thus collected must be reported monthly 
and paid into the state treasury as other taxes, and any defalca- 
tion by a delinquent collector must be pubUshed at once by the 
auditor. Licenses are good from the day of issue, except in 
the case of dram shops, where they date from the granting of 
the license. No license can be granted in a " dry " county, 
or where the majority of the legal voters petition the board 
of supervisors to prohibit the opening of saloons. A failure to 
exhibit a license on demand is considQXQdi prima facie evidence 
that it has not been paid and that the privilege is unlawfully 
exercised. For non-payment or forfeiture a penalty is imposed 
not less than double the tax imposed, or imprisonment in the 
county jail not more than six months, or both. 

Under no circumstances can any privilege be taxed by a 
county or municipality to an amount exceeding 50 per cent of 
the state license ; and a privilege license imposed on insurance, 
telegraph, and sleeping-car companies, building and loan asso- 
ciations, is entirely exempt from county and municipal taxation. 
With the exception of the 50 per cent local tax referred to, the 
privilege-license system in Mississippi is solely a source of com- 
monwealth revenue. 

As a supplement of its pension system, the state exempts 
indigent Confederate soldiers and sailors, their wives or widows, 
from the payment of the tax on all privileges save those on dealing 
in liquors, cigarettes, deadly weapons, jenny-Hnd or pool tables, 
or like contrivances kept for amusement, second-hand clothing, 
and hotel keeping. Thus, the privilege-license system in Mis- 
sissippi operates directly as a means of local prohibition and as 
a source of commonwealth revenue, and indirectly, as a bounty 
to Confederate soldiers and sailors. As a supplementary fiscal 
device levied on general categories, the system is popular and 
practically beneficent. Especially is this true of the railroad 
privilege tax. 

Until very recently it has been well-nigh impossible to collect 
any property tax from railroads because of their claims of char- 
ter exemption. The privilege tax has been the only way of 



TAXES ON BUSINESS 619 

reaching them. Thus, in 1888, a typical year, the percentage 
receipts from railroad property amounted to only ;^2io, while the 
railroad privilege tax aggregated ^140,792. 

Recent reductions in the rate per mile of the railroad tax 
imposed,^ and the legal compulsion placed upon railroads to pay 
both privilege and percentage taxes, have reduced both the 
absolute and relative importance of the railroad privilege tax. 
Thus, in 1898, the percentage receipts from railroads were 
;^I09,833, while the railroad privilege tax was only ;^26,625. It 
may, however, be confidently predicted that the decline in the 
importance of the railroad privilege is only temporary. An 
estimate of gross earnings is more satisfactory to all parties 
concerned as a basis of assessment than a valuation of property. 
An increase in the rate per mile to its old proportions would 
place the railroad privilege tax on an independent footing and 
avoid the double taxation to which railroads are now subjected. 

Although regressive, easily shifted, and undemocratic in 
theory, the privilege-license system is warranted in Mississippi 
by its practical results. It furnishes the state a revenue of over 
;^300,ooo per annum, and is regarded favorably by business 
men as a license charge rather than a business tax. Criticism 
is to be directed, not against the system per se^ but against some 
of the bases of its assessment. 

In many instances the criterion is purely arbitrary, selected 
without any reference to the ability of the persons taxed. Thus, 
all fire, accident, and life insurance companies, which are mem- 
bers of any trafific association, are assessed fixed amounts ; while 
non-traffic companies are taxed 2 per cent on their gross pre- 
miums. With few exceptions the solvent companies of the state 
are members of traffic associations ; and because of their agree- 
ments to maintain rates, the amount of business transacted, 
gross earnings, and other elements of their taxable capacity 
are utterly ignored. This is a useless display of anti-trust 
demagoguery. 

In other instances the criteria selected, while not arbitrary, 

1 In 1888 the average state railroad privilege tax per mile was $83,333^, besides a 
county railroad privilege tax of $4i.66|. In 1898, the state railroad privilege tax on 
first-class roads vi^as only $20, and there was no county tax imposed. (Compare 
Auditor's Report, 1888, p. 106, with Mississippi Laws, 1898, p. 23.) 



620 SELECTED READINGS IN PUBLIC FINANCE 

leave room for evasion and bear no relation to earning capacity. 
Thus, heavily bonded cotton-seed oil mills can escape entirely 
the tax levied in Mississippi on the capital stock of cotton-seed 
oil mills. Large cotton warehouses, which pay in proportion to 
the size of the place in which they are located, may profit at the 
expense of the smaller competitors located in a larger place. 
On the basis of taxation according to output, lumber yards 
having a large output obtained at great expense, may suffer in 
comparison with those having a smaller output obtained at 
proportionately less expense. These are merely typical illustra- 
tions of some of the practical defects in the bases of privilege 
assessments in Mississippi. 

While it would be hazardous to fix arbitrarily upon a test 
of taxable capacity applicable to all cases, nothing but good 
could result from making the bases selected more thoroughly 
applicable to their particular cases. If the standard cannot be 
made uniform, it can at least be made correct. This must be 
done if the Hcense-privilege system in Mississippi is to serve 
to any extent as a corporation tax. 



CHAPTER XVII 
THE CORPORATION TAX 

72. The General Corporation Tax. — The corporation taxes 
of the American commonwealths are either general taxes upon 
all corporations, with certain specifiied exceptions — for which 
special taxes are provided, or special taxes upon corporations 
engaged in certain branches of industry. The general cor- 
poration taxes sometimes apply to all companies, domestic or 
foreign, doing business within the state (as in the cases of Penn- 
sylvania and New York), or to domestic corporations only (as 
in Massachusetts and New Jersey). The special taxes apply 
to railroads, banks, telegraph companies, insurance companies, 
and the like. This section will be devoted to the general cor- 
poration taxes. 

The corporation tax of Massachusetts applies only to domestic 
corporations, and does not extend to banks, trust companies, 
and insurance companies, for which special methods of taxation 
are prescribed. The Massachusetts Commission of 1897 pre- 
sents the following account of the working of the general 
corporation tax : ^ 

First and most important is the general franchise tax on 
corporations chartered or organized under the laws of the com- 
monwealth. This tax is designed to bring about the taxation 
of such corporations fully and fairly, in such manner as to reach 
all their property, and to reach it once and once only. It is 
unique in the tax experience of the states of the Union. No 
other state has adopted this precise mode of taxing the corpora- 
tions whose corporate privileges depend on its laws. 

1 Report, pp. 14-17, 68-71. 
621 



622 SELECTED READINGS IN PUBLIC FINANCE 

In its main outlines the plan of the tax is as follows : The 
real estate and machinery of all corporations situated within 
the commonwealth are assessed by the local authorities, and the 
taxes on them are paid directly to the respective cities or towns. 
The remainder of the property of the corporation, as indicated 
by the market value of the outstanding shares, over and above 
the taxed value of the real estate and machinery, is taxed by the 
commonwealth under the corporation or franchise tax, and pay- 
ment is made in the first instance to the treasury of the com- 
monwealth.^ The proceeds, however, do not accrue in toto to 
the treasury of the commonwealth, but are divided in. large part 
among the cities and towns of the state. 

All corporations chartered by the commonwealth of Massa- 
chusetts, or organized under the general corporation laws, for 
the purpose of business or profit, having a capital stock divided 
into shares, are subject to this annual tax, entitled a tax upon 
their corporate franchise. The tax affects, therefore, corpora- 
tions of the most various kinds, — manufacturing and trading 
establishments, street railways, gas and electric lighting com- 
panies, electric power companies, private water-supply compa- 
nies, telegraph and telephone companies, and certain insurance 
companies. There are some important exceptions, however, to 
the scope of the tax. Saving banks are taxed differently ; banks 
and mutual insurance companies are also treated in a different 
way. For the banks a different method was devised, mainly 
because of the safeguards which the federal government has 
thrown about the national banks. Certain mutual insurance 
companies, on the other hand, are taxed on a different basis. 
Besides these important exceptions there are some others of less 
consequence; as, for instance, in the case of coal and mining 
companies and companies formed to build and operate railroads 
in foreign countries. 

The general corporation tax is assessed by the tax commis- 
sioner with the aid of returns from the corporations and from 
the local assessors. Every corporation must return to the tax 
commissioner, under oath of its treasurer, a complete list of its 
shareholders, their places of residence, the number of shares 

^ By an amendment passed in 1903 the valuation of the intf.ngible property of a 
corporation is not to exceed 120 per cent of the value of the tangible assets. — Ed. 



THE CORPORATION TAX 623 

owned by each on the first day of May, the amount of the capi- 
tal stock of the corporation, its place of business, the par value 
and the market value of the shares on the first day of May, and 
a statement of the works, structures, real estate, and machinery 
owned by the corporation and subject to local taxation within 
the commonwealth ; in the case of railroad and telegraph com- 
panies, the whole length of their lines and the length of so much 
of their lines as is without the commonwealth ; in the case of 
other corporations, the amount, value, and location of all works, 
structures, real estate, and machinery owned by them and sub- 
ject to taxation without the commonwealth. 

The assessors of each city and town also return to the tax 
commissioner by the first Monday in August the names of all 
corporations established in their respective cities or towns or 
owning real estate therein, and a statement of the works, struc- 
tures, real estate, and machinery owned by each corporation, 
and the amount for which such property is valued for local 
taxation. From these returns, or otherwise at his discretion, 
the tax commissioner ascertains the true value of the shares 
of each corporation, which is described in the statute as the 
" true value of its corporate franchise." The shares of many 
corporations being sold from time to time on the open market, 
their market value is comparatively easy to ascertain; but with 
the greater number of corporations affected by the tax, the 
shares are seldom, if ever, sold or offered for sale in open 
market. In the case of such corporations the tax commissioner 
procures from the corporation a statement of the condition of 
the company, of its assets and liabihties. In case of refusal to 
render a statement of condition, the commissioner is authorized 
to examine the books and to examine on oath the treasurer and 
directors. From this information, and such other information 
as he may be able to procure, the commissioner proceeds to put 
upon the corporation what he considers to be a just estimate of 
the true value of its " corporate franchise." 

From the aggregate value of the shares of the company thus 
determined, the tax commissioner makes the following deduc- 
tions. First, in the case of railroad and telegraph companies 
whose lines extend beyond the limits of the state, such portion 
of the whole valuation as is proportional to the length of that 



624 SELECTED READINGS IN PUBLIC FINANCE 

part of their line lying without the commonwealth is deducted ; 
and, further, an amount equal to the value of their real estate 
and machinery located and subject to taxation within the com- 
monwealth. Second, in the case of a telephone company, so 
much of the whole valuation as is proportional to the number 
of telephones used or controlled by it without the common- 
wealth, and also the value of all stock in other corporations 
held by it upon which it has paid a tax for the year preceding. 
Third, in case of an insurance company, the value of mortgages 
on real estate held by it subject to local taxation. Fourth, 
in the case of all other corporations, an amount equal to the 
value of the real estate and machinery subject to local taxation 
within or without the state. The total value of the shares, thus 
diminished by allowance for real estate and machinery already 
taxed, and by the mileage and other apportionment in the case 
of railroad and telegraph and telephone companies, may be 
called the taxable corporate excess. 

This corporate excess is then taxed at a rate which is roughly 
the average rate of taxation in the commonwealth. It is deter- 
mined by an apportionment of the whole amount of money to 
be raised by taxation upon property in the commonwealth dur- 
ing the current year upon the aggregate valuation of all the 
cities and towns for the preceding year. 

The amount of the tax thus computed on corporate excess is 
then collected by the treasurer of the commonwealth. The 
tax commissioner notifies the treasurer of each corporation of 
the amount of its tax ; and the ease and certainty with which 
penalties can be applied to domestic corporations cause the 
taxes to be paid, as a rule, promptly, and with a minimum of 
expense for collection. 

The tax having been paid into the treasury of the common- 
wealth, it is in part distributed among the cities and towns, in 
part retained by the state. On the principle that personal 
property is taxable at the place of the owner's domicile, such 
proportion of the tax as corresponds to the proportion of stock 
owned by persons residing in the commonwealth is credited and 
paid to the several cities and towns where (as may appear from 
the corporation's list of stockholders or from such other evi- 
dence as the tax commissioner may procure) such shareholders 



THE CORPORATION TAX 625 

resided on the first day of May next preceding. The remainder 
of the tax, which represents the shares in Massachusetts cor- 
porations owned by persons who are not residents of any city 
or town in the commonwealth, is retained in the state treasury. 

Yie(d of ike Tax in i8g6 1 

Net amount assessed by the tax commissioner , $3,829,528.02 

Amount certified as due to cities and towns 2,729,665.85 

Balance accruing to the commonwealth j^ 1,099,862. 17 

The taxation of shares in domestic corporations is in striking 
contrast with that of bonds, foreign stocks, and other securities 
taxable to the holder. Here there is no demand for a state- 
ment from the individual taxpayer, no doomage by local 
assessors, no guesswork, no possibihty of evading or diminish- 
ing taxes by change of domicile, no question of double taxation. 
The real estate and machinery are assessed locally ; doubtless 
not with perfect equality and justice, but probably as carefully 
as would be possible under any system. The corporate excess 
is taxed at a uniform rate by the state. The taxes are regular 
and certain. They are heavy, and they yield a large revenue. 
The rate of taxes on corporate excess for the last fifteen years 
has been from year to year not far from ^15 per ^1000, or -about 
one and one half per cent on the capital. The assessment in 
1896 was ;^3,829,528.02. Yet little complaint is heard regard- 
ing these taxes, — a signal proof that the taxpayers accommo- 
date themselves, if not with ease, at least without serious 
complaint, to burdens which are steady, regular, predictable, 
and for which in consequence they are able to make calcula- 
tions and adjust their affairs. 

The corporation tax is particularly simple and is assessed with 
unerring exactness, in the case of large and well-known corpora- 
tions, whose shares are regularly dealt in, and consequently 
have a publicly recorded value. Railways, banks, the larger 

1 In 1904 the gross receipts were $5,166,900, of which sum $1,203,000 was the 
share of the state. The total assessment fell upon the various classes of corporations 
as follows : 

Street railways $912,730 

Other public service corporations 2,686,226 

Business corporations 1,567,944 

Total $5,166,900 — Ed. 



626 SELECTED READINGS IN PUBLIC FINANCE 

manufacturing corporations, and others whose stocks are fre- 
quently quoted, are taxed without a word of inquiry and without 
a possibility of escape. A very large number of miscellaneous 
corporations are in a somewhat different position. Their shares 
are held by a few individuals, are rarely transferred, and are 
without a quotable market value. In these cases the statement 
required by law from the corporation itself as to the market 
value of its shares is important. The tax commissioner may 
further require a transcript of the balance sheet, and other 
information which he deems desirable. No doubt there is a 
possibility of understatement by a corporation of the value of its 
stock, and a possibility of manipulation of the balance sheet. 
There is reason to believe that sometimes the taxes on corpo- 
rate excess are partially evaded in this way ; but the evasions 
are insignificant, in comparison with those as to taxable securi- 
ties. In any case they affect but a small proportion of the total 
taxes collected from Massachusetts corporations. As a whole, 
this part of our tax system is an excellent example of the method 
of taxing corporations at the source, and of refraining from any 
dealings with the individual holder of corporate securities, — a 
method admitted on all hands to be the simplest, most efficient, 
and most equitable in the taxation of corporate property. 

It is unfortunate that similar accounts of the general corpora- 
tion taxes of other states are not available for use in this 
volume, but the following data may be presented : 

{a) New York has devised what have been called justly the 
"most complicated and clumsy" methods known of taxing cor- 
porations. Besides an " organization tax " upon newly formed 
companies, which yielded ^474,667 in 1889, and miscellaneous 
taxes on special kinds of corporations. New York has a general 
corporation tax, in addition to taxes upon the property of cor- 
porations. Every corporation organized under the laws of the 
state must pay an annual tax computed upon the amount of its 
capital stock employed within the state, the rate of taxation 
depending upon the dividends which the corporation has paid. 
Foreign corporations, moreover, pay a similar tax for the privi- 



THE CORPORATION TAX 627 

lege of carrying on business within the state. In addition, real 
estate owned by corporations is taxed for state and local pur- 
poses; while their personal property is taxable for local pur- 
poses, although in most cases it manages to escape in whole or 
in part. Various exemptions and special taxes make the situa- 
tion still more complicated. 

{b) Pennsylvania imposes a general corporation tax upon all 
corporations, both domestic and foreign, except banks and 
foreign insurance companies, but makes certain exemptions for 
companies organized exclusively for manufacturing. This is in 
lieu of other taxation for state purposes. Companies subject to 
the tax pay five mills for each dollar of the actual value of their 
outstanding capital stock, common, special, or preferred; and 
four mills upon each dollar of the nominal value of their bonds 
or other outstanding obligations. In assessing the tax upon 
capital stock, suitable deductions are made for capital employed 
in other states.^ The tax upon corporation bonds applies only 
to bonds owned by residents of the state, since those owned by 
residents of other states are not subject to the jurisdiction of 
Pennsylvania. In 1899 the tax on capital stock yielded 
^4,575,000; and that upon bonds, ;^i, 149,000. 

{c) The general corporation tax of New Jersey applies only 
to domestic corporations and does not extend to banks, rail- 
roads, and manufacturing or mining companies that have 
invested one half of their capital within the state. Of the cor- 
porations subject to the tax, some (such as telegraph, lighting, 
or insurance companies) pay a tax upon their gross receipts or 
earnings ; while the remainder, which contribute the larger 
share of the receipts, pay a tax upon their capital stock. This 
latter tax is one tenth of one per cent upon the capital stock 

^ Thus domestic corporations receive an allowance for tangible property perma- 
nently located outside of Pennsylvania; foreign corporations pay only on the pro- 
portion of their capital invested or employed in Pennsylvania; railroads pay on a 
proportion of capital representing their mileage in Pennsylvania. 



628 SELECTED READINGS IN PUBLIC FINANCE 

up to the sum of $3,000,000 ; one twentieth of one per cent 
upon capital stock in excess of $3,000,000 but not exceeding 
$5,000,000 ; and $50 upon each million of capital stock in excess 
of $5,000,000. This is a tax upon the franchise of the corpora- 
tions, not upon their property, and does not exempt this prop- 
erty from other taxation. Therefore all real and personal property 
of corporations is taxable the same as the property of individ- 
uals ; ^ but, as the state revenue is derived from other sources, the 
property of New Jersey corporations is in practice taxed only for 
local purposes. In 1899 ^^^ franchise tax yielded $1,332,000. 

73. The Taxation of Public-Service Corporations: Report of 
the Connecticut Commission of 1913.^ — The various methods of 
taxing public-service corporations are reviewed in the following 
extract from the report of a Connecticut commission : 

I. The Various Methods of Taxing Public- 
Service Corporations 

History 

The early tax laws of Connecticut, as elsewhere in the United 
States, made no mention of corporations. Corporations were few 
in number, and it was simply assumed that they would be taxed 
upon their property under the general property tax in precisely 
the same manner as natural persons. This was the situation down 
to the middle of the nineteenth century. By that time corpo- 
rations had developed greatly in number and importance, and 
one after another special methods of taxation began to be de- 
vised for the several classes of corporations. The development 
thus started has followed different lines in different states, and 
at different times in the same state, and has resulted in a be- 
wildering variety of methods of taxation. Professor Seligman 
in his "Essays in Taxation" enumerates and discusses twelve 
distinct bases of corporation taxes. As a matter of fact almost 

1 This does not apply, however, to banks, railways, and some other corpora- 
tions, which are taxed in other ways. 

2 Report of the Special Commission on the Taxation of Corporations, pp. 2-20. 
Hartford, 1913. 



THE CORPORATION TAX 629 

every possible method of taxing corporations has been tried by 
some state at some time. Many of the methods developed have 
been clearly defective in principle and have been proved failures 
by experience. At the present time it is safe to say that there 
are only three important methods of taxing public-service cor- 
porations which may fairly claim serious consideration. If we 
are to find the most satisfactory method of such taxation we 
must find it by choosing one of these three. A brief description 
and criticism of each of these three methods of taxation is there- 
fore in order. 

The Ad Valorem Basis 

By this basis we mean that the tax is imposed upon the value 
of the property of the corporation, primarily the value of its 
physical property, although sometimes with an additional amount 
supposed to represent the value of "intangible property," "good 
will," "franchise," etc., etc. This was, of course, the original 
method of taxing corporations under the general property tax, 
excepting that at the start the valuation was made and the tax 
imposed by local officials in exactly the same way as for natural 
persons. This crude method of taxing corporations has been 
abandoned by practically all of the progressive states. It was 
long ago given up by Connecticut. The method is entirely in- 
defensible and needs no further discussion here. 

The ad valorem basis, however, as used and advocated in pro- 
gressive states to-day is something different in that it involves 
a more or less expert valuation of the property of the corporation 
as a whole, made by a state board or officer. As thus adminis- 
tered this method of taxation has been advocated by some au- 
thorities and adopted by a number of important states. This 
method of taxation represents, therefore, an attempt to con- 
tinue the property basis of taxing corporations while providing 
special machinery in order to obtain a true valuation. 

Criticism of the Ad Valorem Basis 

Even as thus administered, however, the ad valorem basis of 
taxation is subject to serious difficulties. Whatever method is 
adopted for obtaining the value of the corporations' property, 
the operation is difficult and expensive. To be properly per- 



630 SELECTED READINGS IN PUBLIC FINANCE 

formed it requires the work of a large force of experts familiar 
with the technical details of the businesses of the corporations 
concerned. At best the element of personal judgment is sure 
to enter. The responsibility thus placed upon the assessing 
officers or board is very heavy. Since thousands of dollars in 
taxes may be at stake, depending merely upon the personal 
judgment of the official, the motive and opportunity for political 
interference or corrupt influence on the part of the corporations 
concerned is evident. 

Besides practical difficulties, important - theoretical questions 
arise. In the majority of cases there is, and can be, no such 
thing as an actual sale of the property of a public-service cor- 
poration. The selling price is, therefore, unavailable as a basis 
of valuation. Shall the appraisal, then, seek to determine the 
original cost of the property or the cost of replacement, and 
if the latter, shall allowance be made for the present condition 
due to depreciation? As illustrating the complicated character 
of such an appraisal and the heavy cost involved, we may refer 
to the experience of the state of Michigan. In the years 1900 
and 1901 a valuation was made of the property of the railroad 
companies of Michigan for the purpose of taxation. This was 
the most thorough and scientific valuation of its sort ever at- 
tempted. It involved not only a physical valuation, but also 
an examination of the financial operations of the railroads. The 
physical valuation alone occupied a period of nine months and 
required a corps of some seventy-five engineers, although not 
all of these were employed during the whole time. The cost of 
the investigation was in the neighborhood of $60,000, which is 
in addition to an even greater sum required for the expenses of 
the tax commission, a large part of whose work was devoted to 
the same object. 

Another difficulty with this method is its rigidity. Valuations 
when once made are very likely to remain for a considerable 
period of years without serious revision. This is caused partly by 
the very fact of the difficulty and expense involved in a thorough- 
going valuation. As a result, such valuations, no matter how 
successfully made at the start, very soon come to be unreliable. 

Finally the valuation of property alone is, after all, not a true 
measure of the worth of the corporation, or of its tax-paying abil- 
ity. The ordinary public-service corporation obtains its earnings 



THE CORPORATION TAX 631 

and its value from sources of which the value of its physical prop- 
erty is only one element. The United States Supreme Court found 
in the Ohio Express Company cases that '' $23,400 worth of horses, 
wagons, safes, and so on, produced $275,446 in a single year." 
Practically every attempt to tax corporations upon the value of 
their physical property has shown the insufficiency of this basis 
by itself, and has led to the attempt to correct the results thus 
obtained by means of some other measure. Various attempts 
have been made to get at some measure of the value of in- 
tangible property, good W\\\, franchise rights, etc. For example, 
the state of Michigan after making the elaborate investigation 
mentioned above was unable to adhere to the values thus ob- 
tained for the purpose of taxation, admitting that such values 
might either exceed or fall short of the true value of the whole 
system of the corporation. The Michigan commission was, 
therefore, compelled to correct its results by falling back upon 
the earning power of the corporations. 

Enough has probably been said to show the serious de- 
fects of the method of taxation based upon an appraisal of 
the value of the property of the corporations. Connecticut 
does not at present use this method for the taxation of any 
class of public-service corporations, and it is not likely that the 
state would seriously consider a change to this method. 

The Capitalization Basis 

By this method we mean the imposition of a tax upon the 
value of the securities of the corporation. This sometimes 
includes only the value of the stock. To be correct, however, 
it should include the value of stock and bonds. This is the 
method at present used by Connecticut in the taxation of rail- 
road corporations, the tax being based upon the market value 
of stock plus the value of funded and floating indebtedness, 
the whole being apportioned as between Connecticut and 
other states. As at present employed in Connecticut this 
method is decidedly unsatisfactory. Its defects will be pointed 
out in detail in the chapter on railroads. To a considerable 
extent, however, the weakness of Connecticut's method of tax- 
ing railroads is due to the numerous exceptions, complica- 
tions, and other excrescences which have been gradually added 



632 SELECTED READINGS IN PUBLIC FINANCE 

to the system during a long period of years. Leaving the dis- 
cussion of these defects to the chapter on railroads, it is our 
purpose here to criticise the fundamental character of this 
method of taxation. 



Criticism of the Capitalizatio7i Basis 

There can be no question that the basis of the value of secur- 
ities is far preferable to that of the physical value of the prop- 
erty. The market value of the securities of a corporation under 
normal conditions represents the real value of the corporation 
according to the estimate of investors and others who are best 
qualified to judge. When made to include not only the stock but 
the bonds, and perhaps also the floating indebtedness, this gives 
a real measure of the value of the investment in the corporation. 
There are, however, serious difficulties here also. In the first 
place it often happens that the securities of a given corporation 
are not regularly dealt in on the market. Sales may be few and 
scattered, and such scattered sales are quite apt to be entirely 
insufficient as a measure of the real value of the corporation's 
securities. The market value of corporation securities is also sub- 
ject to considerable fluctuation from time to time, due to causes 
external to the business of the corporation, such as the condition 
of the money market, the general investment situation, etc. Mar- 
ket values are also subject more or less to variations in price due to 
intentional manipulation of those in control, or the result of spec- 
ulative dealings or attempts to gain control of the management. 

While it might be admitted that these are all considerations 
which actually do enter into the value of corporation securities, 
yet it cannot be denied that values thus determined are at best 
a poor index of tax-paying ability. In general the value of the 
securities of a corporation depends upon the earnings which are 
hoped for. When this is the case, the value of the securities is 
a true guide for the levying of taxes. Those who object to this 
basis of taxation do so, consciously or unconsciously, because 
of the feeling that the market values of securities are frequently 
based on something other than earning power. Since this is 
often the case, and in view of the other difficulties involved in 
the tax on capitalization, the question naturally arises. Why not 
impose corporate taxation directly upon the earnings them- 



THE CORPOEATION TAX 633 

selves? Earnings are generally admitted to be the true index 
of tax-paying ability, which is sought more or less indirectly by 
other methods of taxation. 

The Tax on Earnings 

The earnings of a corporation are the real basis of the value of 
its property, the value of its securities, and its tax-paying ability. 
This statement will generally be admitted at once, and it is also 
demonstrated by the result of the experience of other methods of 
taxing corporations. As a matter of theory, the earnings of a 
corporation are the only true measure of its value and its tax- 
paying ability. The basis of earnings is also the simplest in 
practice and the one that involves the least administrative diffi- 
culty. The weight of authority of economists, practical experts, 
tax commissioners, and others is distinctly in favor of the earn- 
ings basis. This is the system which is coming into more and 
more favor to-day. 

Net Ear7iings vs. Gross Earnifzgs 

Before going further into the discussion it is necessary to 
settle the question whether the tax shall be based upon net or 
gross earnings. There can be no question that it is net earnings 
which are the true measure of value. Gross earnings may be 
large or small according to the amount of operating expenses. 
The balance left after paying operating expenses out of gross 
earnings is what gives value to any enterprise. It would appear 
at first, therefore, that any tax system to be just should be im- 
posed upon net earnings. Here, however, we are at once met 
with serious practical difficulties. While it is a simple matter to 
ascertain the total amount of earnings, it is by no means so 
simple to determine what should be deducted for expenses. 
Operating expenses are more or less a matter of bookkeeping 
definitions. To avoid serious inequality and evasion the tax on 
net earnings w^ould require for administration a thorough exami- 
nation into the accounts of every corporation taxed, together 
with strict rules as to how these accounts should be kept. AH 
of this would be required in order to insure that each corpora- 
tion would make exactly the proper deductions from gross earn- 
ings to obtain net earnings. It would be a continual source of 



634 SELECTED READINGS IN PUBLIC FINANCE 

irritation between the corporations and the taxing officials. It 
would involve the most disagreeable inquisition into the accounts 
and business of the corporations, and in the end there would still 
remain room for personal judgment, thus leaving open the door 
to political intrigue and corrupt influence. The British system of 
taxing railroad corporations undertook to use net earnings as the 
basis. The Ontario Commission on Railway Taxation in 1905 
found, however, that the British attempt to get at net earnings 
had been virtually abandoned, allowance for expenses being 
made by an arbitrary deduction from gross earnings. 

The practical difficulties in the way of imposing a tax upon 
net earnings seem overwhelming. A further objection arises 
from the fact that a corporation might have no net earnings 
whatever in a given year, and therefore escape taxation entirely. 
While it is true that this might be perfectly just under a tax 
system based fundamentally upon income, we should bear in 
mind that the American tax system is to-day based upon prop- 
erty. The individual whose property has yielded him no income 
in a given year cannot offer that as a reason why he should not 
pay taxes upon his property. While the importance of treating 
corporations and individuals upon the same footing must not be 
stretched, there can be little doubt that a tax system which would 
allow corporations having no net earnings to escape taxation 
entirely would be out of harmony with the general tax system 
prevailing in America to-day. 

II. The Gross-Earnings Tax 
Advantages of the Gross-Earnings Tax 

The tax on gross earnings avoids all the difficulties inherent 
in the tax on net earnings. No corporation can do business with- 
out having accounts which will at least show the amount of its 
gross earnings. Gross earnings are a definite fact, ascertained by 
a glance at the accounts, and incapable of argument or difference 
of opinion. The tax on gross earnings can be evaded only by 
perjury of the most obvious sort and capable of easy detection. 
The gross-earnings tax, therefore, has the great advantage of 
simplicity, certainty, and ease of administration. This is an ad- 
vantage both to the corporation and to the state. The amount 
of the tax on gross earnings fluctuates with the prosperity or 



THE CORPORATION TAX 635 

adversity of the business and is, therefore, just to all parties con- 
cerned. Moreover, it enters each year into the accounts in a 
definite ratio, and can thus be counted on in advance. 

Classification of Corporations Necessary 

A serious question remains to be answered. Will not the tax 
on gross earnings be distinctly unfair on account of the great 
diversity between different corporations in their ratios of ex- 
penses to earnings? The answer is that such injustice is to be 
avoided by classifying corporations according to the prevailing- 
ratio of net earnings to gross, and imposing different rates upon 
the gross earnings of the different classes of corporations. 

Investigation shows, for instance, that the ratio of net earn- 
ings to gross is fairly uniform for the railroads of the country. 
In the same way there is a general prevailing ratio of net earn- 
ings to gross for telephone companies, for express companies, 
etc. Having determined what this prevailing ratio is for each 
class of corporations we are enabled to fix rates for each class 
which will make the tax on gross earnings just to all. It is 
true, of course, that absolute justice as between individual cor- 
porations of the same class is not obtained. The resulting in- 
justice is, however, not great. Careful investigations by the 
Ontario Commission of 1905 and the California Commission of 
1906 have demonstrated that no great injustice will result be- 
tween different corporations engaged in the same business by a 
tax at a uniform rate upon the gross earnings of all. Some in- 
equality is unavoidable, but the inequality thus resulting is dis- 
tinctly less than can be easily shown to result from any of the 
other schemes of taxation which are before us. No tax system 
can be absolutely perfect, and it is not a valid objection against 
a proposed scheme to point out a defect which is present in even 
greater degree in each of the other possible alternative measures. 

We conclude, therefore, that the tax on gross earnings pre- 
sents distinctly the most advantageous method for the taxation 
of public-service corporations. 

The Rate of the Gross-Earnings Tax 

In establishing a system of taxation based on gross earnings 
the first and most important problem is to determine the rates at 



636 SELECTED READINGS IN PUBLIC FINANCE 

which the tax shall be imposed upon different classes of corpo- 
rations. The object is to determine rates which shall tax the 
different classes of corporations fairly as compared with the taxa- 
tion borne by other forms of wealth. The ratio of net earnings 
to gross differs as between different classes of corporations, and 
this makes it necessary to impose the gross-earnings tax at 
different rates. 

For example, suppose a certain corporation with gross earnings of 
$100,000 had expenses of $80,000, leaving $20,000 of net earnings. 
Suppose another corporation engaged in a different business, having also 
gross earnings of $100,000, shows expenses of $60,000, leaving its net 
earnings $40,000, or twice the net earnings of the first corporation. It 
is obvious that a tax upon gross earnings at a uniform rate would im- 
pose an unjust burden upon the first corporation, since net earnings are 
the true measure of what the tax burden should be. This injustice 
could easily be corrected, however, by imposing different rates. Suppose 
that we wish to impose a tax that shall be equal to 10 per cent of net 
earnings. This would be obtained by a tax of 2 per cent upon the gross 
earnings of the first corporation, and by a tax of 4 per cent upon the 
gross earnings of the second. In other words, whatever the amount of 
tax to be obtained, the rate imposed on the gross earnings of the 
second corporation should be twice the rate imposed upon the first. 

Determination of the Rate of the Gross-Earnings Tax — 
Explanatiofi of Method 

The determination of the rate of the gross-earnings tax re- 
quires, therefore, a careful study of the situation of the different 
classes of corporations at the outset. Of the various possible 
methods of arriving at the proper rate the one employed by the 
California Tax Commission of 1906 is undoubtedly the most 
correct. We must first decide what is the measure of the tax 
burden to be imposed. Here we may fairly assume, as was done 
by the California Commission, that the object should be to im- 
pose a tax burden upon the corporations which shall be as nearly 
equivalent as possible to the burden of taxation borne by other 
wealth under the general property tax. This being the measure 
of the burden to be imposed, it then becomes necessary to find 
what rate imposed upon the gross earnings of the several classes 
of corporations will produce such a result. We may fairly as- 



THE CORPORATION TAX 63; 

Slime that wealth in general bears a tax burden equal to about i 
per cent of its true value. This was the result of the investiga- 
tion of the California Commission, and this is the rate generally 
agreed to by tax authorities. 

In order to compare a tax upon earnings with a tax upon the 
capital value of wealth it is necessary to translate the one into 
the other by means of a rate of capitalization, which in general 
is the rate of yield normally obtained by investment in the cor- 
porations in question. 

For example, if the regular annual net earnings of a certain corpora- 
tion are $600 and we assume that a fair rate of capitalization is 6 per 
cent, the capital value of this corporation is obtained approximately by 
dividing its net earnings, $600, by the assumed rate, 6 per cent, giving as a 
result $10,000. If wealth in general is assumed to bear a tax burden of 
I per cent, then this corporation should pay a tax equal to i per cent 
of $10,000, or $100. $100 is 16.66 per cent of $600. Therefore a tax of 
16.66 per cent upon the net earnings of this corporation would be 
equivalent to a tax of i per cent upon its capital value. In general, to 
obtain the rate of a tax on net earnings which shall be equivalent to a 
given tax rate; on capital value we divide the rate on capital by the 
rate of interest, or the rate of capitalization. 

Our problem, hov/ever, is to find a rate, not on net earnings, but on 
gross earnings. To return to the above example, let us assume that the 
gross earnings of the corporation are $1800. The net earnings are there- 
fore one-third of the gross. Then, to produce the same am.ount of tax, 
the rate imposed upon gross earnings must be one-third of the rate upon 
net earnings. In general, whatever is the ratio of net earnings to gross 
we must multiply the desired rate of a tax on net earnings by the 
ratio of net earnings to gross in order to obtain the equivalent tax rate to 
be imposed upon gross earnings. 

It is probably not necessary to explain that net earnings are used 
in this calculation, not as a permanent basis of the tax, but in order to 
classify corporations at the outset so as to determine proper rates for 
the gross-earnings tax. 

Since we are proposing to collect a tax equal to about i per 
cent of the capital value of the corporation's property, we must 
increase the rate of yield by i per cent in order to reach a fair 
rate of capitalization. To sum up the above discussion ; we must 
ascertain, first, the rate of taxation borne by wealth in general 
under the general property tax; second, the proper rate at which 



638 SELECTED READINGS IN PUBLIC FINANCE 

to capitalize the earnings of each class of corporations, which 
will be, in general, the rate of yield of the investment plus i per 
cent to allow for the tax ; third, the prevailing ratio of net earn- 
ings to gross for each class of corporations. We then obtain 
the proper rate of the tax on gross earnings for each class of 
corporations by dividing the rate of the general property tax by 
the rate of capitalization and multiplying by the ratio of net 
earnings to gross. The result will give the rate which, imposed 
upon gross earnings, will cause a tax burden equivalent to that 
borne by wealth in general under the general property tax. This 
process may be expressed mathematically as follows : 

Let t equal rate of the general property tax (upon full value). 

Let i equal rate of capitalization. 

Let r equal ratio of net earnings to gross earnings. 

Let :*; equal required rate of the gross-earnings tax. 

Then x = —r- 

For example, suppose that it is determined that wealth in general is 
taxed at the rate of i per cent upon its true value. Suppose that inquiry 
establishes the fact that investment in the securities of the particular class 
of corporations we are concerned with yields a return of 5 per cent. 
Suppose, further, that investigation shows that the prevailing ratio of 
net earnings to gross for the class of corporations in question is 30 per 
cent. Then ^ is i per cent, i is 6 per cent {i.e., 5 per cent + i per cent), 
and r is 30 per cent. Substituting these figures in the formula, we have : 



1 y 30 r 



T"0 0" ^ 1 0" 



ifo i°o 



We should conclude, therefore, that the proper rate to impose upon 
gross earnings is 5 per cent, and that if the gross earnings of the corpora- 
tions in question are taxed 5 per cent the result will be equivalent to the 
tax upon wealth in general at the rate of i per cent. 

I . Measure of the Burden of the General Property Tax 

The next question is to determine the facts necessary to the 
application of this formula. The rate of taxation borne by 
wealth in general is a matter of fact to be determined by careful 
investigation. It is obvious that a mathematically exact result 
is impossible on account of the prevailing undervaluation of 



THE CORPORATION TAX 639 

property and our inability to measure exactly what this under- 
valuation is. Those who have studied the question, however, 
have generally come to the conclusion that i per cent represents 
about the rate of taxation upon the full value of wealth in 
general. The California Tax Commission of 1906 came to this 
conclusion after a very thorough investigation of the tax con- 
ditions in that state. In Connecticut the average tax rate in 191 1 
as reported by the tax commissioner was 1.38 per cent on an 
assessed valuation averaging, according to assessors' reports, 
89 per cent. This is equivalent to a rate of 1.23 per cent on the 
true value. 

We are probably justified then in assuming that i per cent 
represents the average burden of the general property tax upon 
the full value of wealth in general. 

2. The Rate of Capitalization 

The rate of yield obtained upon investment in the securities 
of any given class of corporations is likewise a matter of fact. 
To obtain the utmost possible exactness requires an elaborate 
investigation of each corporation. (See the careful study of 
Mr. B. H. Meyer in U. S. Census Bulletin 21, 1905.) A fair 
approximation, sufficient for our purposes, may be obtained by 
comparing the amount of dividends paid upon stock or interest 
paid upon bonds with the market value of such stocks or bonds. 
This will do for normal conditions. Allowance must of course be 
made for peculiar circumstances. For example, suppose the 
stock of a given corporation is paying regular dividends at the 
rate of 9 per cent, by which we mean that each $100 share of 
stock pays an annual dividend of $9. Suppose that the market 
value of this stock is $150, which likewise means that each $100 
of stock is worth on the market I150. The rate of yield upon an 
investment in this stock is determined by dividing the annual 
dividend by the market value of a share of stock. Thus : 

This means that investors in the stock in question are willing 
to accept a yield of 6 per cent upon their wealth invested in the 
corporation in question. Such an investigation must be under- 
taken to determine what is the average rate of yield upon in- 
vestments in the securities of each class of corporations with 



640 SELECTED READINGS IN PUBLIC FINANCE 

which we are concerned. This is a simple matter for stocks 
paying regular dividends and regularly quoted on the market. 
It is, of course, obvious that any special circumstances affecting 
dividends and market value must be taken into account. It is 
also true that there will be certain corporations for which this 
method^is not practicable. In general, however, for a whole class 
of corporations engaged in a particular business it is entirely 
practicable by this method to determine with sufficient approach 
to accuracy the prevailing rate of yield upon investments in the 
concerned. 

3. The Ratio of Net Ear7ii7tgs to Gross Earnings 

The ratio of net earnings to gross must also be determined 
by investigation. This is the factor in the problem which re- 
quires the most extended investigation. It is to be obtained by 
careful study of the accounts and the business circumstances 
of the class of corporations concerned. While the investiga- 
tion must necessarily be technical and somewhat laborious, it 
is entirely possible by this means to determine with a suffi- 
cient degree of accuracy w^hat actually is the prevailing ratio 
of net earnings to gross among the class of corporations 
concerned. 

Qtcalifieations 

The method described above for determining the proper rate 
of the gross-earnings tax is subject to some qualifications, owing 
to the nature of the matters of fact which enter into the 
computation. In the first place, the assumption that the rate of 
the general-property tax is about i per cent upon the full value 
of property disregards the fact that a considerable amount of 
property escapes taxation entirely. The rate of i per cent 
represents the burden of taxation upon wealth which actually is 
taxed. Just what the result would be if we could take account 
also of wealth that evades taxation it is, of course, impossible to 
say. For Connecticut in particular it is important to remem- 
ber in this connection that general-business corporations are not 
subject to state taxation and usually escape with a comparatively 
light burden of local taxes. A tax system for public-service 
corporations based upon this assumption therefore treats such 
corporations unfairly as compared with the general-business 



THE CORPORATION TAX 641 

corporations. This is a matter, however, which Hes outside 
the scope of your commission's investigation. Therefore it 
must be borne in mind that our assumption that wealth in gen- 
eral bears a tax of i per cent is somewhat higher than would 
result if we could take an average including all wealth that 
escapes taxation as well as that which is taxed. 

Secondly, the method of determining the proper rate of 
capitalization does not lead to mathematically exact results. 
Some additional allowance might perhaps fairly be made for 
the fact that large additions of new capital cannot be at- 
tracted into a business without offering a rate somewhat higher 
than satisfies present investors, as shown by the market value 
of the securities and the rate of dividends paid. For this 
reason, and to avoid injustice due to possible inexactness of 
the method, we may ordinarily take a rate of capitalization some- 
what higher than the one determined by the method indicated. 

As regards the ratio of net earnings to gross, the calculation 
wnli usually produce sufficiently correct results provided the 
accounts of the corporations are accurately kept. In many cases, 
however, the accounting methods of the corporations have not 
made sufficient allowance for depreciation. Where this is shown 
to be the case allowance- must be made by some reduction in the 
apparent ratio of net earnings to gross. Taking these considera- 
tions all together it is likely that the rate of the gross-earnings 
tax as determined by the method here described will be somewhat 
higher than is actually warranted. In determining the rate of 
the gross-earnings tax, therefore, due consideration should be 
given to these facts in the final result. 

Other Tests 

The method just described for determining the proper rate 
of the gross-earnings tax upon a given class of corporations is 
the most scientific one and the one which in general will produce 
the most accurate results. These results, however, should be 
checked up by means of other tests which, though less correct, 
can be made useful in verifying the results or preventing injus- 
tice due to exceptional conditions. 

(i) We may determine the market value of the securi- 
ties of the corporations, including stocks and bonds and other 



642 SELECTED READINGS IN PUBLIC FINANCE 

indebtedness which represents real investment of capital. Then 
assuming that the value of the securities represents in general 
the real worth of the property in the corporation, calculate the 
amount of a tax of i per cent upon this value and determine the 
rate which, applied to gross earnings, would produce this amount. 
For corporations whose securities are regularly quoted on the 
market this whole process is a simple mathematical calculation. 

(2) We may perform the same calculation, but take as our 
starting point the book value of the corporation ; that is, the 
sum of the capital, surplus, and undivided profits, or equivalent 
items. We then determine what rate imposed upon the gross 
earnings would produce an amount equivalent to i per cent of 
this book value. 

(3) We may determine the actual value of the physical 
equipment of the corporation ; that is, the net plant value. To 
avoid a special physical appraisement we may ordinarily ac- 
cept the book value of the plant. We then calculate what rate, 
imposed upon gross earnings, will produce a sum equivalent to 
I per cent of this plant value. 

Obviously, none of these tests is absolutely reliable, as we 
have already shown in discussing the proposal to use one or 
other of these bases as the basis of the tax itself. In particular 
the plant value is apt to give too low a result, since the actual 
value of the corporation as a going concern is generally con- 
siderably greater than the physical value of its plant. On the 
other hand, all other methods are apt to be too severe. The 
reason for this lies in our assumption that wealth in general is 
taxed about i per cent of its true value. This point has been 
discussed above. 

Exemption of the Corporations' Securities 

The gross-earnings tax as developed in the preceding sections 
is intended to be the equivalent of a tax upon the total property 
of the corporations. The imposition of such a tax should logi- 
cally carry wdth it the exemption from taxation of the stocks and 
bonds of the corporations in the hands of the holders. Taxa- 
tion of a corporation directly upon the total value of its prop- 
erty (at a rate determined by the method described above) 
and taxation also of its securities in the hands of the holders 
would be a flagrant case of double taxation. This theoretical 



THE CORPORATION TAX 643 

proposition is so clear that it needs no further discussion. The 
practical application is, however, far less 'simple. As a practical 
proposition, the necessity of exempting stocks from taxation will 
hardly be denied, and the difficulties in the way of carrying out 
the exemption are not so serious. As to the exemption of bonds, 
the practical difficulties are apt to be great. If bonds formerly 
have been subject to taxation, exempting them from taxation 
on the introduction of a new corporation tax is a pure gift to the 
bond holders, and brings no relief to the corporation except that 
future bond issues may perhaps be made at slightly lower rates 
of interest. Again, the situation of a given state may be such 
that it can hardly afford to grant exemption from taxation to all 
the holders of the bonds of a given class of corporations simply 
because it taxes such corporations directly upon their earnings or 
property. For instance, a state might be the place of residence 
of a large number of wealthy owners of bonds of a certain inter- 
state corporation which did a very small business in the state. 
The state tax upon this corporation, based upon its share of the 
corporation's property or earnings, would be a small matter, and 
would hardly justify the exemption from taxation of all of the 
bonds of the corporation owned by citizens of the state. This 
situation is bound to be of common occurrence until some 
uniformity of taxation by the various states is reached. In the 
meantime it may often be practically inadvisable to entirely 
exempt bonds from taxation. 

As regards the Connecticut situation, the commission has 
found no practical difficulty in the way of exempting from 
taxation in the hands of the holders the shares of stock of all 
corporations which are directly taxed by the state. This ex- 
emption, as a matter of fact, involves only slight change from 
the present situation, since the shares of stock of the corpora- 
tions now paying taxes to the state are now practically exempt 
from taxation in the hands of the holders. 

The bonds of railroad corporations paying taxes to the state 
are already exempt from taxation by statute, and the commis- 
sion sees no reason for making any change. The bonds of other 
corporations paying taxes to the state are at present taxable as 
personal property in the hands of the owners. The commission 
is of the opinion that complete exemption from taxation of the 
bonds of all corporations paying taxes to the state of Connecti- 



644 SELECTED READINGS IN PUBLIC FINANCE 

cut would not be justilied under present conditions. This de- 
cision is based upon the reasons which have been explained in 
general terms above. The commission has concluded that a 
fair compromise will be the exemption from taxation, in the 
hands of the holders, of bonds of corporations holding their 
charters from the state of Connecticut, while leaving bonds of 
foreign corporations subject to taxation as at present. This is 
the recommendation which the commission has made for each 
of the classes of corporations which it has investigated. 



in. Experience of Other States in taxing 
Public-Service Corporations 

Very few states undertake to tax all public-service corpora- 
tions by the same method. Detailed descriptions of the methods 
of other states will, therefore, come more properly in the chap- 
ters discussing the separate classes of corporations. In the 
present connection, however, it will be valuable to take a general 
survey in order to shed light upon the problem from the expe- 
rience of the states. 

The Ad Valorem Basis 

The majority of the states still cling to the property basis in 
taxing corporations. Some of them have not gone beyond the 
old general-property tax. Others have gone further and pro- 
vided more or less efficient state machinery for the assessment 
of the property of corporations. Michigan and Wisconsin have 
advanced farther than any others in the making of exhaustive 
valuations and the establishment of elaborate machinery for 
administration of the law. The old idea that corporations must 
be taxed upon the basis of property dies very hard. This is 
partly due to popular ignorance which has led people to cling 
tenaciously to the notion that the general-property tax is the 
one and only perfect method of taxation. It is also due in large 
measure to a very common notion that equality of taxation re- 
quires that all subjects be taxed by the same method. This sup- 
posed principle is even incorporated in many of the constitutions 
of the states, which are thus forced to continue with obsolete 
tax methods. It is, however, gradually declining, and the de- 



THE CORPORATION TAX 645 

cline is most noticeable in those states which have progressed 
farthest in wealth and industrial development. The w^eight of 
authority is generally against this method. 

The ^' Stock-and-Bond'' {Capitalization) Method 

A considerable number of states use the value of stocks and 
bonds, or of stocks alone, as the basis for the taxation of all cor- 
porations or of certain classes, often in combination with local 
taxes on property. Massachusetts, New York, and Pennsyl- 
vania have general corporation tax systems based primarily upon 
this method. Massachusetts and New York take account of 
stock only, while Pennsylvania includes bonds. Various other 
states make more or less use of this method, often in connec- 
tion with a tax based primarily upon the value of property. 
Even Michigan and Wisconsin, at present the chief advocates 
of the property basis, are unable to avoid considerable use of 
the stock-and-bond method. The difficulties with this method 
of taxation are generally recognized even in the states where the 
system is in use. While it is generally recognized that this 
method is far superior to the old property basis, few authorities 
Avill be found to urge this system as the best method of taxing 
corporations. 

The Gross-Earnings Basis 

Many states to-day which have departed from the old prop- 
erty basis use the gross-earnings basis for the taxation of certain 
classes of corporations. Among such states this is the favor- 
ite method for the taxation of telephone companies, telegraph 
companies, and express companies. It is also a common method 
for the taxation of sleeping-car and other car companies. Half 
a dozen states use it as a principal or important secondary 
method for the taxation of railroads. The weight of authority 
is most decidedly in favor of the gross-earnings tax. Without 
going into a discussion of authorities it should be mentioned 
that most of the recent state reports on this subject have recom- 
mended the gross-earnings basis for the taxation of public- 
service corporations. We may mention in particular the reports 
of the Ontario Commission on Railway Taxation of 1905, 
the California Commission of 1906, the Rhode Island Commis- 



646 SELECTED READINGS IN PUBLIC FINANCE 

sion which reported in 1910, 191 1, and 1912, and the Virginia 
Commission of 1911, all of which recommended the gross-earnings 
basis for public-service corporations. To this list might be added 
a long list of economists and tax experts who have recently 
urged the superiority of the gross-earnings tax. 

The Experience of Michigan and Wisconsin 

The important states of Michigan and Wisconsin, after an ex- 
perience of many years with the gross-earnings tax as applied 
to railroads, abandoned this method about ten years ago in favor 
of the ad valorem basis. This event, being contrary to the gen- 
eral trend, besides being so important of itself, deserves spe- 
cial consideration. Thorough accounts of this movement in 
each of the states have been presented by the Ontario Com- 
mission and the California Commission, as Avell as in the reports 
of the tax commissions of the two states concerned. We can 
give here only a brief summary of what took place. 

Michigan and Wisconsin had both had the gross-receipts 
tax as applied to railroads for a number of years. In both 
states the method was abandoned after several heated political 
campaigns. Michigan attempted to make the change in 1898, but 
found that her constitution stood in the way. In 1899 ^ ^^^ 
commission was appointed and charged to investigate the subject. 
This commission, after an extensive investigation, reported in 
favor of the ad valorem basis. The constitution was accordingly 
amended in 1900, and in that year and the next a very thorough 
valuation was made of the railway property of the state. This 
involved a physical valuation as well as a valuation of the securi- 
ties. It was carried out under expert direction with a large corps 
of engineers, and at heavy expense. The ad valorem method of 
taxation was then adopted, and after much opposition and litiga- 
tion was finally upheld in 1906 by the United States Supreme Court. 

In Wisconsin a similar movement started in 1899. ^ state 
tax commission was appointed which, after an investigation, ad- 
vocated the ad valorem method. After a heated campaign the law 
was passed in 1903. The valuation of railroad property was 
not so elaborate or expensive as in Michigan. A permanent 
state commission was created, charged with the duty of valuing 
railroad property. It is understood that the commission de- 



THE CORPORATION TAX 647 

pends mainly upon the value of stocks and bonds and upon 
capitalized earnings. An attempt was made to preserve the inde- 
pendence of the commission by providing salaries of $5000 and 
fixing the terms of the commissioners at eight years, with other 
provisions to avoid sudden changes. 

In both states, therefore, the operation of the law is placed 
in the hands of a tax commission, and in the last analysis the 
valuation placed upon railroad property depends upon the judg- 
ment of these commissions. Both states still find it necessary to 
make frequent reference to earnings in order to arrive at a fair 
valuation ^of railroad property. 

IV. Problems of Interstate Commerce 

Apportionment of Interstate Earnings 

It is obvious that no state can fairly impose a tax upon the 
total gross earnings of a corporation derived from business done 
partly without the state. Just as a tax imposed upon the 
property of a corporation should fail only upon its property lo- 
cated within the state imposing the tax, so the tax on gross 
earnings must be imposed only upon such share of the gross 
earnings as may fairly be assigned to the state imposing the 
tax. We are for the present concerned only with the question 
of economic justice as between states and not with any consti- 
tutional question. Where corporations are doing business of an 
interstate character it is necessary, therefore, to devise some 
equitable rule by which the gross earnings may be apportioned 
as between the state imposing the tax and other states. To make 
the apportionment as exact as possible we should assign to 
the state imposing the tax all earnings from business performed 
wholly within the state. We should exclude all business done 
wholly without the state. We should then assign to the state 
in question its share of all business which crosses the state 
line. The latter might be accomplished in any one of a num- 
ber of different ways. The most obvious is to keep track of 
each shipment, or message, or passenger, and apportion the 
earnings according to the mileage covered. Another somewhat 
similar method is to apportion the earnings from each transac- 
tion by a so-called rate prorate, according to which we assign 
to a given state its share of the charge for each transaction ac- 



648 SELECTED READINGS IN PUBLIC FINANCE 

cording to the ratio of the rate on the distance covered within 
the state to the rate for the whole distance covered by the trans- 
action in question. Such a method of apportioning gross earn- 
ings would give a high degree of exactness to the apportionment, 
but is subject to the objection that it involves a complicated system 
of accounting for every interstate transaction. This would be 
burdensome and expensive to the companies concerned, would be 
difficult for the state officials to check up, and would be hard for 
the general public to understand. Such difficulties as these should 
be avoided if possible, even though it may be necessary to adopt 
a less exact and more arbitrary rule of apportionment. ■ 

In general, a sufficiently exact apportionment of earnings 
may be made by adopting some arbitrary basis, such as the 
total number of miles of railroad track in the state as compared 
with the total miles of track of the whole system, or the mileage 
of wires of a telegraph or long-distance-telephone company, 
or the number of telephone instruments within and without the 
state for a telephone exchange company, etc. Such methods 
of apportionment have the advantage of being simple, easily 
understood, involving no complicated accounts, and being very 
easily administered. It is not difficult for each class of cor- 
porations to discover some such simple method of apportioning 
to a given state its share of the gross earnings of a corporation 
doing interstate business. 

ConstiUUionality of the Gross-Earni7igs Tax 

One of the obstacles which has hindered the development of the 
gross-earnings basis of taxing corporations has been the quite 
common notion that the taxation of gross receipts from interstate 
commerce was forbidden to our states by the Federal constitution. 
There can be no question that this popular notion comes from 
ignorance of the decisions of the United States Supreme Court, 
yet the notion has persisted, and even so able a body as the On- 
tario Railway Commission of 1905, after a study of American 
tax systems, was led into the popular error of supposing that the 
states were without power to levy taxes upon gross receipts 
from interstate commerce. Since so large a proportion of the 
public-service corporations are engaged in interstate commerce, 
this notion, if it were true, would, obviously be an effectual bar 



THE CORPORATION TAX 649 

against this method of taxation. As a matter of fact, however, 
this notion is entirely erroneous. 

This subject has been thoroughly studied by various author- 
ities. A careful examination of the whole subject was made 
by the California Tax Commission of 1906, which examined a 
long line of decisions of the United States Supreme Court. 
Mr. A. E. Holcomb, in a paper read before the Fifth Annual 
Conference of the International Tax Association in 191 1, pre- 
sented a careful summary of the decisions of the Supreme Court 
on this matter. Willoughby in "Constitutional Law," published 
in 1910, reviews the subject. Finally, the Supreme Court itself 
in its opinion in Galveston, Harrisburg, and San Antonio Rail- 
way Company vs. Texas — 210 U. S. 217 — ^took occasion to 
review a long line of its own decisions upon this matter. In view 
of the thorough and able study that has been given to this 
question it is not necessary for this commission to discuss it 
at length. The conclusions may be briefly stated as follows : 

First of all, there is no question of the general principle 
that all laws which impose taxes directly upon receipts from 
interstate commerce are in violation of the Federal Consti- 
tution and void. On the other hand, the right of a state to 
impose taxes upon the property of corporations within its 
borders is unquestioned, even though the corporations be engaged 
in interstate commerce. Again, a state may value the property 
of corporations by the ''unit rule"; that is, may ascertain the 
total value of the entire system and then apportion to the state 
in question a share of the entire property according to the ratio 
of the mileage within the state to the total mileage of the system, 
or according to the ratio of business done within the state to the 
business of the whole system. In arriving at the value of the 
property of a corporation a state is free to make its earnings, 
either net or gross, the basis. The most important recent cases 
in which this matter has been settled are the following: In 
Maine vs. Grand Trunk Railway Company — 142 U. S. 217 — 
a tax based upon the gross receipts of railway companies was 
held valid on the ground that it was not a tax directly upon gross 
receipts, but only made use of gross receipts as a measure of the 
value of the franchise and property of the company. In Postal 
Telegraph Company vs. Adams — 155 U. S. 688 — the Court gave 
the clearest possible statement of the principle that a state tax is 



650 SELECTED READINGS IN PUBLIC FINANCE 

valid if it is in commutation of a property tax and does not 
amount to more than the tax would have been upon the ad valorem 
basis. Finally in the case of Galveston, Harrisburg, and San An- 
tonio Railway Company vs. Texas — 210 U. S. 217 — the Supreme 
Court of the United States examined its previous decisions and 
explained all apparent inconsistencies. The law at issue in this 
particular case was declared invalid on the ground that it was not 
the only tax upon the corporation concerned, but was in addition 
to another tax upon the whole property of the corporation. 

We may sum up this discussion by the following quotation 
from Willoughby's "Constitutional Law": 

From the foregoing it would appear that the law with reference to 
the state taxation of the gross receipts of companies doing an interstate- 
commerce business is not in as definite shape as might be desired. One 
general principle may, however, be deduced from all the cases. This is, 
that a state tax is invahd whatever its form if, in effect, it lays a direct 
burden upon interstate commerce ; and that, conversely, a state tax is 
valid, however measured or (if we follow the doctrine of Maine vs. 
Grand Trunk Ry.) whatever its form, which may be fairly held to be a 
tax on the property of the company, whether tangible or intangible. The 
tax being thus valid, if valid at all, only as a property tax, its non- 
payment may never involve a forfeiture of the right of the company to do 
an interstate-commerce business. The doctrine of Maine vs. Grand Trunk 
Ry. that a tax measured by the gross receipts may be sustained as a fran- 
chise or excise tax upon the right of the company to do business in the 
state is certainly unsound, and is, it would appear, as above indicated, so 
recognized in Galveston H. & S. A. R. R. Co. vs. Texas. 

Perhaps the general doctrine which we have been considering is best 
stated and illustrated in Postal Telegraph Cable Co. vs. Adams (155 U.S. 
688), in which it was held that a state has the power to levy on a foreign 
telegraph company doing both a domestic and an interstate business a 
franchise tax, the amount thereof being graduated according to the value 
of the property within the state, such tax being in lieu of all other taxes. 
Though in terms a franchise tax, the tax was held valid as, in fact, taking 
the place of a property tax, which, of course, the state might constitu- 
tionally levy. 

It appears, therefore, that there can be no question of the right 
of a state to impose a tax at a given rate upon the earnings of 
a corporation as an exclusive tax, and in lieu of all other taxes 
upon the property of the corporation, provided the resulting 



THE CORPORATION TAX 651 

burden is fairly measured so as not to be in excess of the burden 
which would be imposed by a tax on the ad valorem basis. 

74. The Taxation of Public-Service Corporations: Report of 
a Committee of the National Tax Association/ — Certain impor- 
tant aspects of the taxation of public-service corporations are 
considered in the following report of another committee of the 
National Tax Association : 

The committee upon the taxation of public-service corporations 
was asked to consider solely the question of the "equalization of 
taxation upon public-service corporations subject to ad valorem 
taxation." We have confined ourselves to this single subject. 

After conference with the secretary of the tax association, the 
chairman of the committee formulated last spring a question- 
naire designed to bring out fully the views of members of the 
committee ; and by correspondence the committee began an 
interchange of opinions which continued during the spring and 
summer. On October 11 a tentative report, based upon the 
results of the correspondence, was submitted by the chairman 
for the consideration of the committee ; and meetings were 
held at Buffalo, on October 22 and 23. The committee submits 
the following report which was adopted by a unanimous vote: 

I 

The taxation of public-service corporations by the several 
states is characterized by such diversity of methods that it is 
difficult to present any general statement upon the subject. 
Taxes upon property, capital stock, franchises, and earnings 
are all employed, sometimes alone and sometimes in combina- 
tion. Little uniformity is found in the methods applied to the 
same class of corporations, and between different classes the 
diversity is naturally greater. It happens, however, that most 
of the problems connected with the equalization of the burden 
of taxation can be studied to best advantage in the taxation of 
railroads, and a statement confined to that class of corporations 
may serve as a useful introduction to this report. 

At the present time three of the states ^ tax gross receipts in 
lieu of other taxation of the franchises and operating property of 

1 Proceedings of the National Tax Association^ Vol. VII, pp. 372-383. 

2 Maine, Minnesota, and California. 



652 SELECTED READINGS IN PUBLIC FINANCE 

railroads. At least seven other states/ however, employ gross- 
receipts taxes in addition to, or in combination with, taxes upon 
property or franchises. 

Delaware levies a tax of fixed amount in lieu of all other taxa- 
tion, and Pennsylvania imposes a tax levied at the rate of five 
mills upon the capital stock. In these states, therefore, the rate 
imposed upon railroads bears no relation to that levied upon 
other property subject to taxation. 

In Maryland railroad property is locally assessed, and sub- 
ject to taxation at local rates. In the remaining states all or 
some part of the railroad property, usually that described as 
operating property, is assessed by some state board or commis- 
sion. These states tax railroads according to some kind of ad 
valorem method, but exhibit none the less considerable diversity. 

Connecticut taxes the outstanding stocks and bonds at the 
rate of i.i per cent, which is assumed to represent the average 
rate imposed upon other property. Massachusetts taxes the 
capital stock at an average state rate, and deducts from the value 
of the stock the value of real estate and machinery subject to 
local taxation. In Rhode Island the tangible property is sub- 
ject to local taxation at local rates, while the state levies a tax 
upon gross receipts in lieu of taxation of the intangible property. 

The remaining states fall into two classes. Four states, 
namely, Michigan, Wisconsin, New Jersey, and New Hampshire, 
tax railroad property as a unit at an average state rate. Michi- 
gan and New Jersey impose the average nominal rate of state tax 
without equalization; while Wisconsin attempts to ascertain 
through the state tax commission the actual state rate, and New 
Hampshire has in the past equalized the valuation by reducing it 
so as to correspond with the valuation of other taxable property. 
We understand, however, that the New Hampshire commission 
now assumes that other property in the state is taxed at its full 
value, and therefore assesses railroads at the full valuation. 

The other states provide for the assessment of all railroad 
property, or railroad-operating property, by some kind of 
state board or commission, and then apportion the assessed 
valuations among the local taxing districts for taxation at 
local rates. Of these states most, if not all, authorize some sort 

1 Maryland, Ohio, South Carolina, Texas, Virginia, Pennsylvania, and Rhode 
Island. 



THE CORPORATION TAX 653 

of equalization of railroad assessments with these placed upon 
property locally taxed. In Oregon this equalization seems rea- 
sonably effective, and in perhaps a few other states partial relief 
from over-taxation is afforded. But in general the state boards 
are unable to cope effectually with the problem under existing 
provisions of law, and in some cases make no attempt to do so. 
Recently Kansas, Arizona, and Colorado, and in somewhat less 
degree New Mexico, have made systematic efforts to bring 
local assessments of every class of property up to the full value, 
with the result that the rates now imposed upon public-service 
corporations in these states are tending to approximate the 
actual rates paid by other property. 

It will be seen that the prevailing practice is assessment, by a 
state board or commission, of at least the operating property 
of railroads, and the subsequent apportionment of the taxable 
values thus ascertained among the local taxing districts. Com- 
paratively few states have provided eft"ectually for the equaliza- 
tion of taxation. Fouf states tax railroad property as a unit at 
an average state rate, but of these Wisconsin is the only one that 
now equalizes such taxation. Massachusetts taxes the capital 
stock at an average state rate which does not take into account 
the undervaluation of property subject to local taxation, and 
Connecticut taxes the stocks and bonds at a fixed rate of i.i per 
cent, which may be assumed to represent the average imposed 
upon other property. Your committee finds therefore that only 
in a small minority of states is provision made at the present 
time for equalization of taxation upon public-service corporations 
subject to ad valorem taxation. 

Of the states that impose taxes upon gross receipts in lieu of 
other taxation of railroad property, we understand that Minne- 
sota and California have endeavored to make the rate of taxation 
correspond as nearly as possible with the average imposed upon 
other property. In Maine we understand that special conditions 
have led to the imposition of a rate of taxation upon gross 
receipts that is somewhat lighter than that imposed upon other 
property. 

The method of taxing other classes of public-service corpora- 
tions cannot be considered in detail. It appears, however, that 
in most cases telegraph and telephone companies are taxed by 
methods similar to those employed in the taxation of railroads. 



654 SELECTED READINGS IN PUBLIC FINANCE 

The same thing is true also, though perhaps not in equal de- 
gree, of express, parlor-car, and other transportation companies. 
Where ad valorem methods of taxation are employed it appears 
that only a small minority of the states have as yet undertaken 
to equalize taxation in any effective manner. 

II 

Your committee first directed attention to the question whether 
there should be any equalization of the taxes imposed upon 
public-service corporations under the system of ad valorem taxa- 
tion. Upon this subject we find three theories which require 
consideration. 

The first theory is that public-service corporations should be 
subject to special taxation much heavier than that imposed upon 
other classes of business or property because they hold special 
franchises of great value. In some cases also these franchises 
have been secured without adequate compensation and by meth- 
ods that will not stand close examination. In this view of the 
case taxation is a logical and convenient means of recovering for 
the public treasury income that rightfully belongs to it. 

A generation ago, before states and the nation had undertaken 
to regulate effectively, through commissions or otherwise, the 
service and charges of public-service corporations, this theory 
offered a natural and logical remedy for some of the evils of un- 
regulated monopoly. Taxes upon the property of unregulated 
monopolies will tend, generally speaking, to fall upon the monopo- 
lists, and by their agency the government may secure a share of 
the profits of the monopolies. But the situation changes when 
public-service corporations are brought under effective regula- 
tion. Under the latter condition regulation of rates and service 
must proceed upon the theory that the corporations should be 
allowed to earn a reasonable return upon a fair valuation of 
their property. Special taxes upon regulated monopolies, there- 
fore, merely increase the expense of providing the service and in- 
crease the rates necessary to yield a reasonable return, or else 
diminish the resources available for extending and improving this 
service. Effective regulation completely alters the incidence of 
special taxes upon monopolies, and at the same time removes the 
evils which led to the demand for such taxation. 



THE CORPORATION TAX 655 

Your committee believes that it is through public regulation 
and not through taxation that a correct policy towards public- 
service corporations must be worked out, and holds that our 
theories of taxation should be based upon the assumption that 
public-service corporations are to be subjected to public control. 
We therefore conclude that this first theory is based on condi- 
tions that are rapidly passing away and is unsuited to the present 
era of regulated public-service corporations. Of course our 
reasoning does not apply to existing contractual payments, 
sometimes called taxes, or require the relinquishment of such 
payments without compensation in the way of reduced rates or 
increased service. These payments present a special case which 
is an exception to the general rule. 

A second theory assumes effective regulation of public utilities, 
and then holds that such regulation makes it unnecessary to 
equalize taxation of public-service corporations with the taxation 
of other business or property. Railroads, for example, might be 
exempted from all taxation provided that their charges were re- 
duced or service improved in a measure corresponding to the 
benefits derived from such exemption ; w^hile, upon the other 
hand, railroad taxes might be increased to any desired extent 
without injustice to the roads, provided rates were increased in 
corresponding degree. In the former case the public would se- 
cure untaxed service ; in the latter the government would employ 
the railroads as an agency for the collection of heavy taxes upon 
transportation. In neither case are the interests of the railroads 
affected, either favorably or adversely. 

If one holds that in taxation there can be no such thing as 
equality, and that governments should be guided solely by the 
principle of plucking the most feathers with the least squawking, 
it is possible to accept this theory, and either exempt public- 
service corporations or single them out for special taxation. No 
special favor will be shown the corporations in the one case and 
no injustice done in the other ; the whole question is one of 
feathers and squawking. 

xAgain, if we hold to the principle of equality of taxation but 
consider merely equality in the taxation of different classes of 
investments under the property tax, no inequality would arise 
from the adoption of this second theory. Regulation of rates 
and services would transfer from the owners of public-service 



656 SELECTED READINGS IN PUBLIC FINANCE 

corporations to the consumers of the services the benefits of tax 
exemption or the burdens of special taxation. 

But if we interpret the principle of equality broadly and con- 
sider the effect of this policy upon different classes of citizens, 
we shall find the second theory untenable. Your committee 
believes that it is necessary to consider carefully the interests of 
two classes of people, the taxpayers and the consumers of the 
services of public-service corporations. It is sometimes assumed 
that between these two classes there is substantial identity of 
interest. It is supposed, for instance, that, if railroads are 
exempted, the persons who receive untaxed services are the 
same ones who bear the new taxes levied in order to produce 
the needed revenue; and that if, on the other hand, special taxes 
are imposed on railroads, the effect of such taxes is the same as 
that of taxes levied upon persons or property generally. Such 
an assumption is inadmissible. 

With corporations national in scope it may be true that, if we 
leave out of account citizens residing abroad and foreigners re- 
siding temporarily in the country, the persons that consume the 
service are the same body of people that must pay the taxes ; 
but it is by no means true that the extent to which particular 
persons use the service is the measure of the contributions they 
make to the national revenues. Even if all taxation were direct, 
and w^ere, in fact as well as theory, levied proportionally upon 
property or income without exemptions of any description, it 
would be certain that all taxpayers would not use the services 
of public-service corporations in proportion to the amount of 
their property or income. When we consider that direct taxa- 
tion is not necessarily proportional, either in theory or in 
actual operation, and that exemptions are both numerous and 
important, it becomes evident that the assumed identity of 
interest between consumers and taxpayers does not exist. With 
services local in scope the case is even stronger, since many 
taxpayers are likely to be nonresidents, while the service may be 
used extensively by persons who are employed in one locality 
during the day but have their domicile elsewhere. What identity 
of interest in this matter can there be between the taxpayers of a 
large city and the army of suburbanites using the local transpor- 
tation facilities ? 

Since the interests of taxpayers and consumers are not identi- 



THE CORPORATION TAX 657 

cal, it follows that exemption of public-service corporations 
from taxation confers a special benefit upon consumers at the 
expense of taxpayers; and by a parity of reasoning it. follows 
that the imposition of special taxes upon such companies relieves 
the taxpayers at the expense of the consumers. In exceptional 
cases special considerations may justify the grant of what is in 
effect a bounty to consumers, or justify the imposition of spe- 
cial taxes upon them ; the rule of equality is not an absolute one 
which admits of no exception. But your committee holds that, 
as a general proposition, this second theory is inconsistent with 
the principle of equality in taxation, and for this reason we are 
compelled to reject it. 

There remains the third theory, that the taxation of public- 
service corporations should be governed by the general rule of 
equality, which theory your committee approves. We hold that 
equality should be the controlling principle in governmental 
affairs, and that in none is it more necessary than in the matter 
of taxation. Absolute equality, of course, may be difficult and 
even impossible of attainment ; in taxation, as in other affairs, we 
are obliged to do the best we can under all the circumstances. 
But the ideal should be equality, and in practice we should never 
lose sight of that ideal. 

Equality of taxation, however, must be real and not formal 
merely. Where conditions diff'er widely, equality cannot be ob- 
tained by an iron rule of uniformity. Similar treatment of things 
essentially dissimilar produces inequality, not equality, as is well 
shown by the experience of the American states with the general 
property tax. This was recognized long ago by the Supreme 
Court of the United States, in a familiar case^ in which the fol- 
lowing language occurs : 

This court has repeatedly laid down the doctrine that diversity of tax- 
ation, both with respect to the amount imposed and the various species 
of property selected either for bearing its burdens or for being exempt 
from them, is not inconsistent with a perfect uniformity and equality of 
taxation in the proper sense of those terms ; and that a system which 
imposes the same tax upon every species of property, irrespective of its 
nature or condition of class, will be destructive of the principle of uni- 
formity and equality in taxation, and of a just adaptation of property to 
its burdens. 

^ Pacific Express Company v. Seibert, 142 U. S. 351. 



658 SELECTED READINGS IN PUBLIC FINANCE 

Real equality in taxation, then, requires careful consideration 
of circumstances and conditions ; in other words, it requires dis- 
crimination and classification. This tax association has from 
the beginning upheld the doctrine of classification, and in the 
successive conferences held under its auspices this doctrine has 
rarely been called in question. Your committee, in upholding the 
principle of equality, emphatically asserts the necessity of classi- 
fication ; and holds that, without classification, real, as distin- 
guished from formal, equality is absolutely unattainable. Our 
tax laws must recognize the economic differences of the various 
classes of property. Household effects, intangible property, 
forests, — these and, doubtless, other classes of property need 
to be segregated and treated as the circumstances of each class 
require. In short, equality does not mean a uniform rule of taxa- 
tion such as the constitutions of so many states now prescribe. 

But classification can be approved only so far as the circum- 
stances of each case justify it, and the presumption is always 
in favor of uniformity. Separate classification of any class of 
property is justified only so far as the economic characteristics 
of the class make such a course desirable and even necessary. 
The burden of proof undoubtedly rests upon the advocate of 
classification, and he should expect to be required to prove his 
case. There can be no justification for the claim sometimes made, 
both by advocates and opponents of the doctrine of classifica- 
tion, that the mere acceptance of that doctrine destroys the pre- 
sumption in favor of uniformity and makes it unnecessary to 
consider the relative burdens imposed upon different classes of 
property and business. The aim should always be to secure 
equality, and classification is defensible only as a means to the 
end of securing real, as contrasted with formal, equality. 

So far as the taxation of public-service corporations is con- 
cerned, your committee is unable to find any good reason for 
giving such companies a separate classification. No peculiar 
difficulties are encountered in finding and assessing the property 
of such companies. No reason appears why consumers should 
be given untaxed service at the expense of taxpayers, or why 
taxpayers should be relieved at the expense of consumers. Ex- 
ceptional cases may, of course, be found; but these should be 
dealt with as they arise. The general rule should be equality of 
taxation of public-service corporations and of all property which 



THE CORPORATION TAX 659 

is not for good and sufficient reasons accorded a special classi- 
fication. In other words, the taxation imposed upon public-service 
companies should be the same as that imposed upon property 
subject to the full rate of state and local taxation. 

It will be observed that we do not think that the rate imposed 
upon public-service corporations should be reduced because some 
other kinds of property may be exempt or may be given a special 
classification and taxed -at a lower rate. Such exemption or special 
classification should never be made except for special reasons 
relating to the economic nature of the property concerned and 
in no way pertinent to property left unclassified. The existence 
of such special classes of property in no way affects the status 
of others, and furnishes no more reason for separately classify- 
ing public-service corporations than it affords for extending 
similar treatment to real estate. Public-service corporations 
should be taxed like other property subject to full rate of state 
and local taxation unless it can be clearly shown that peculiari- 
ties inherent in this class of property justify a separate classi- 
fication. If it is said that existing or proposed exemptions 
threaten to impose an excessive burden upon property remain- 
ing taxable at the full rate, this consideration furnishes a reason 
for not making the exemptions rather than a justification for 
other separate classifications. 

Ill 

Assuming that public-service corporations should be taxed at 
the same rate as real estate and such other property as may be 
subject to the full rate of state and local taxation, it remains to 
consider certain questions concerning the application of the 
principle. The first is whether the principle of equality requires 
ad valorem taxation in all cases and forbids the use of special 
taxes. We are clearly of the opinion that it does not. The rates 
of specific taxes, even taxes upon gross receipts, can be readily 
adjusted from time to time so as to make them substantially 
equivalent to the rates imposed upon all unclassified property. 
In this manner substantial equality of burden can and should be 
secured. Equality, as we have said before, does not imply uni- 
formity of method in all cases, or exclude diversity of method 
when differences of conditions make it desirable. 

A similar answer must be given the second question: Is the 



66o SELECTED READINGS IN PUBLIC FINANCE 

principle of equality violated when public-service corporations 
are taxed, as units, at an average rate of ad valorem taxation 
which represents as nearly as may be the average rate of local 
taxation in the state ? Here again, we reply, real and substantial, 
not formal, equality is the end at which we should aim ; and in 
certain cases this may be more readily and certainly attained by 
state assessment at an average rate than by local assessment 
at local rates. This is especially true of such corporations as rail- 
roads, the operating property of which may be located in many 
or even all the counties of the state. 

The third question concerns the method of valuation. If the 
valuation of public-service corporations is determined by capi- 
talizing net earnings or ascertaining the value of outstanding 
securities, it is evident that all intangible assets are included in 
the assessment ; and it is the practice of most of the states to 
disregard these elements in the taxation of other classes of prop- 
erty. Can such diversity of methods be reconciled with the prin- 
ciple that taxation should be equalized, or does equality require 
that intangible assets be taken into account in all cases or else 
disregarded in all ? 

Abstractly considered, there seems to be no doubt that it is 
inconsistent with the principle of equality to value the property 
of public-service corporations by methods that include intangible 
assets and to value other property by methods that exclude 
them. Since we do not consider it practicable to introduce 
methods of valuing public-service corporations that shall exclude 
these elements of value and tax the companies upon the valuation 
of their tangible assets solely, we hold that equality can be 
reached only by including the same elements in the valuation of 
other classes of property that are not given a separate classifi- 
cation. With corporations this can be done without difficulty. 
With other classes of property and business we believe it is ex- 
tremely difficult, and probably impossible, to tax intangible assets 
equally under any system of property taxation, and that the 
difficulty cannot be solved until the states are ready to adopt 
some form of income taxation. In other words, the inequality 
which we encounter at this point is inherent in the nature of the 
present system of state and local taxation and cannot be eradi- 
cated without fundamental changes in this system. Between 
different classes of corporations, however, there should be no 



THE CORPORATION TAX 66 1 

difficulty in securing substantial equality in the methods of 
valuation, and this should undoubtedly be done. 

The fourth and final question relates to the equalization of the 
tax rate itself. Property subject to local assessment is often 
undervalued, and som.e classes of it largely or wholly elude the 
taxgatherer. The result is that the rates of local taxation are 
greatly in excess of the rates which would prevail if all property 
were assessed, and at its true value ; so that any class of prop- 
erty that is assessed at its true value is subject to grossly un- 
equal taxation. This matter was well treated by the committee 
of this association Vv^hich in 191 1 reported upon "The Taxation 
of Banks and Financial Institutions."^ 

The committee holds that, whether public-service corporations 
are taxed at local or at average state rates, they should be sub- 
ject to the true, and not the nominal, rates of state or local 
taxation. So long as undervaluation of other property continues, 
therefore, we hold that either the valuation of public-service 
corporations should be made on the same basis as that of other 
property, as is the practice in a few states, or that the corpo- 
rations should be taxed at the true rate imposed upon other 
property, as is the practice in Wisconsin. Better still would be 
the eradication of the evil of undervaluation of property by the 
local assessors, as is nov/ attempted in Kansas, Arizona, Colorado, 
and New Mexico ; but this must necessarily be a work of time, 
and in the interim public-service corporations are entitled to 
fair play. 

75. State and Local Taxation of Banks: by F. R. Fairchild.^— 

The taxation of banks is treated in the following selection : 

Federal legislation at the time of the Civil War placed great 
restrictions upon the freedom of the states in the taxation of 
national banks and, indirectly, of all banking institutions. As a 
result, bank taxation has followed lines quite different from taxa- 
tion of other corporations and now shows more uniformity of 
method. Serious difficulties still remain. But the point has been 
reached where agreement upon a satisfactory system seems quite 
possible. Since this is so, the problem of bank taxation is worthy 
of special attention. 

1 Proceedings of the Fifth Co7iference, pp. 313-324. 

2 Reprinted from the American Economic Review., December, 1916. 



662 SELECTED READINGS IN PUBLIC FINANCE 

Banks were among the earliest corporations established, and 
some of the very first laws providing for special taxes upon cor- 
porations apply to banks. The first state law imposing a special 
tax on banks was passed by Georgia in 1805 and placed a tax of 
2Y2. per cent upon the capital stock of banks and ^ of i per 
cent upon their note circulation. Taxes on the capital stock of 
banks were imposed by New Jersey in 1810 and by Massachusetts 
in 1812. Pennsylvania in 1814 introduced a tax based upon the 
dividends or net profits of banks at the rate of 6 per cent, raised 
in 1824 to 8 per cent. Other states followed with special methods 
of taxing banks, 'the most popular one being the tax upon capital 
stock, only a few states using the tax on dividends. Most of the 
states still clung to the old-fashioned general-property tax upon 
all the property of the banks. This was the situation down to 
the middle of the nineteenth century.^ The whole course of 
events was then changed by the legislation, of the Civil War. 

In 1862 Congress established the national banking system and 
in the act of 1864 provided for certain federal taxes on national 
banks, which were to be in lieu of all existing taxes upon such 
banks.^ The act goes on to specify, however, that the shares of 
stock in national banks may be taxed as personal property of the 
owners under the authority of the states in which the banks are 
located.^ This provision has remained in force until the present 
day with only slight changes. The state legislatures are at 
liberty to determine the method of taxing the shares of national 
banks subject only to two restrictions : namely, that the taxation 
must not be at a higher rate than is imposed upon other moneyed 
capital, and that the shares owned by persons residing outside the 
state must be taxed only at the place where the bank is located. 
The real estate belonging to national banks is also expressly 
subject to state and local taxation the same as other real estate. 

This legislation has had a profound eiTect upon the history of 
bank taxation. In the absence of such a law it is likely that the 
taxation of banks would to-day present the same diversity and 
confusion as is seen in the taxation of other kinds of corporations. 
Cinder the influence of this law, however, there is greater uni- 
formity to-day in the taxation of banks than in any other class 
of corporations. 

1 Cf. Seligman, Essays in Taxation (eighth edition), pp. 151-161. 

2 U. S. Revised Statutes, sect. 5214. ^ /^/^_ sect. 5219. 



THE CORPORATION TAX 663 

The federal statute regarding the taxation of banks has been 
frequently interpreted by the courts, until at the present time 
there can be little question as to its exact meaning.^ The term 
"other moneyed capital" has been so interpreted as greatly to re- 
strict its meaning. It has been held to include only other taxable 
moneyed capital.^ The fact that certain moneyed capital is en- 
tirely exempt from taxation will not stand in the way of the 
taxation of capital invested in national banks. Furthermore, it 
has been held that the term is restricted to capital competing with 
national banks. ^ Under the New York statute it was held that 
trust companies were not competitors of national banks.* This 
appears to be scarcely a tenable position, however, and there is 
reason to believe that it might be altered.'^ The courts have 
clearly held that savings banks and building-and-loan associa- 
tions are not to be regarded as competitors of national banks ; ® 
special favors to such institutions therefore will not invalidate 
the taxation of national banks. The term, in brief, seems to 
include practically only capital invested in the stock of other 
commercial banks and (probably) trust companies, and money in 
the hands of individuals employed in a manner similar to the 

1 For a valuable digest of the decisions down to 1906, cf. Report of the Com- 
mission on Revemie and Taxation of California^ 1906, pp. 230-235. The list of 
references in the California report is so full that reference is made in this article 
only to a few of the leading cases prior to 1906. Cf also Judson, The Powder of 
Taxation, ch. 9, " Taxation of National Banks." 

2 Van Allen v. Assessors, 3 Wall. 573 ; People v. Commissioners, 4 Wall. 244. 

3 Mercantile National Bank v. New York, 121 U. S. 138, and numerous later 
decisions. Cf. California report, op. cit. 

4 Jenkins v. Neff, 186 U. S. 230. 

5 Under the New York law, trust companies are now taxed by exactly the same 
method as national and state banks, except that the tax is assessed to the trust 
company by the state instead of to the individual shareholders. See the descrip- 
tion of the New York law below. The question is therefore no longer of practical 
importance. There is reason to believe, however, that if the state law should seek 
to make a clear discrimination in favor of trust companies the present attitude of 
the Supreme Court might be modified. In the decision of a recent case (People 
of New York ex. rel. Amoskeag Savings Bank v. Purdy, 231 U. S. 373), the court 
referred to trust-company stock in such a way as to imply that it was " other 
moneyed capital " in the sense of the federal statute. The point was not material 
to the issue in this case, however. 

^ Davenport Bank v. Davenport Board of Equalization, 123 U. S. 83 ; National 
Bank of Redemption v. Boston, 125 U.S. 60; Mercantile National Bank of 
Cleveland v. Hubbard, 98 Fed. Rep. 465. 



664 SELECTED READINGS IN PUBLIC FINANCE 

employment of bank capital. The restriction that the taxation 
of national-bank stock shall not be at a greater rate than that 
of other moneyed capital has been held to apply not only to the 
tax rate but to the assessment as well.^ In other words, equality 
in tax burden is required. The decisions have also made clear 
that no property belonging to national banks may be taxed except 
real estate.^ It has also been held that, even though the taxation 
of real estate together with the taxation of the total value of 
the shares of stock involves double taxation, this is no violation 
of the statute.^ It is possible, therefore, to tax the entire value 
of all the capital stock of a national bank and in addition impose 
a tax upon its real estate, provided only that the same method is 
applied to other forms of moneyed capital. No deduction need 
be made from the valuation of the shares on account of invest- 
ment of the capital in property either elsewhere taxed* or exempt 
from taxation, as United States bonds.^ The law permits the 
state to require the bank to pay the entire tax upon its shares 
of stock.^ This does not make it a tax upon the bank ; the bank 
is assumed to be acting as the agent of the stockholders and 
has reserved the express right of charging the tax against each 
stockholder with a lien upon the dividends and shares of stock 
as security.'^ 

The result has been that the states are practically restricted to 
one method in the taxation of national banks. Moreover, the re- 
quirement that there shall be no discrimination against the stock 
of national banks as compared with other moneyed capital has 
been so strictly interpreted as virtually (though not expressly) 
to mean that this method of taxing national banks is legal only in 
case other banks are taxed in practically the same way.^ As a 

1 People of New York v. Weaver, lOO U. S. 539. 

2 Rosenblatt v. Johnston, 104 U. S. 462. 

^ Peoples National Bank of Lynchburg v. Marye, 107 Fed. Rep. 570. 

* Pacific National Bank of Tacoma v. Pierce Co., 20 Wash. 675. 

5 Mercantile National Bank v. New York, 121 U.S. 138; Home Savings 
Bank v. Des Moines, 205 U.S. 503; Hager z/. American National Bank, 159 
Fed. Rep. 396. 

^ First National Bank v. Kentucky, 9 Wall, 353 ; Merchants and Manufacturers 
National Bank v. Penn., 167 U. S. 461. 

■^ Merchants and Manufacturers National Bank v. Penn., 167 U. S. 461 ; Home 
Savings Bank v. Des Moines, 205 U. S. 503. 

^ Cf. California report, op. cit., p. 229. 



THE CORPORATION TAX 665 

result, the method prescribed by federal law for the taxation of 
national banks has generally been extended by the states to other 
banking- institutions. The old-fashioned taxation of banks on 
their property under the general-property tax has been prac- 
tically abandoned. Banks are to-day not generally taxed at all 
except upon their real estate, which is taxed locally like other 
real estate, while the shares of stock in banks are taxed as per- 
sonal property of the owners in conformity with the federal 
statute relating to the taxation of national banks. 

It must not be concluded that the problem of the taxation of 
banks has been solved. There still remains opportunity for di- 
versity in matters of detail, with serious inequality and injustice 
resulting. The various methods of taxing bank shares may be 
conveniently grouped into two classes, (i) Bank shares are 
taxed by local officers as part of the general-property tax. The 
value of the shares is assessed by local officers, and the tax rate 
is the local rate of the general-property tax. (2) The taxation is 
under a uniform method prescribed by state law. The assess- 
ment is uniform throughout the state and usually determined by 
a state officer or board. The rate also is generally uniform, 
though it is not always so, and several methods of determining 
it are in use. 

In the majority of the states, taxation of bank shares is still 
a matter of local administration. The local assessor determines 
the value of the shares just as he assesses other property under 
the general-property tax. The assessment is relatively easy, 
since the banks may be required to furnish the necessary facts, 
including a list of stockholders with their residences and the 
number of shares held by each. Nevertheless the assessment is 
practically at the personal discretion of the assessor, and a 
confusing variety of rules and methods has resulted. 

In most states the law recpiires that all property be assessed 
at its full cash value. In seeking to arrive at this value some 
assessors try to determine the market value of shares from 
available records of sales. In other cases the book value is 
taken ; that is, the sum of capital, surplus, and undivided profits. 
Some assessors take capital only, paying no attention to surplus 
and imdivided profits. In Colorado the state tax commission 
recently undertook to fix the value of bank, shares by taking 
capital, surplus, average undivided profits for the year, and 4 per 



666 SELECTED READINGS IN PUBLIC FINANCE 

cent of the total deposits. A Wyoming law of 1913 provides 
that bank shares shall be assessed on their par value plus the 
surplus and undivided profits in excess of 50 per cent of the 
capital. In North Dakota banks are assessed on the capital, 
surplus, and undivided profits, less an amount equal to 5 per 
cent of the loans and discounts, on the theory that banks may 
fairly be allowed to assume such a shrinkage in their assets.^ 

To add to the confusion, the values thus determined are fre- 
quently reduced by a certain percentage in recognition of the 
prevailing under-assessment of other kinds of property. The 
basis of assessment varies all the way from 100 per cent down 
to 25 per cent or less. In most cases the value of the shares of 
stock is reduced by deducting the value of real estate assessed 
to the bank. 

Without going into further details, it is clear that inequality 
and injustice must result from this method of taxation. The 
greatest inequality between banks, even in the same state, is an 
inevitable result. For example, it is reported that in Kentucky 
the state board of assessment values bank stock at 80 per cent 
of the capital, surplus, and undivided profits, but local assessment 
in each of the 120 counties is at the personal discretion of the 
county assessor, with the result that assessment is anywhere from 
60 per cent up to 100 per cent of the capital, surplus, and undi- 
vided profits. In addition there are city assessors, so that cases 
are on record of a bank assessed at 80 per cent of its book value 
for state purposes, 70 per cent for county purposes, and 100 per 
cent for city purposes.^ A study of bank assessment in Montana 
indicated that for the year 1912 assessments in various counties 
varied from 18 per cent to yy per cent.^ The inequality caused 
by unequal assessrnent is of course intensified by the variety of 
local tax rates. 

1 For complete details the student must consult the statutes of the several 
states. For brief summaries of the tax systems of all the states, c/. U. S. Census, 
" Wealth, Debt, and Taxation," 1913, Vol. I. Much useful information is contained 
in the reports of state tax commissioners, boards of equalization, bank commis- 
sioners, etc. C/. also numerous articles in Proceedings of the National Tax Asso- 
ciation, especially Paton, " State Taxation of Banks," Vol. VIT, pp. 315-341, and 
" Report of Committee on Taxation of Banks and Financial Institutions," Vol. V, 

PP- 313-324- 

2 Paton, op. cit., pp. 329-330. 3 /^/V. r>. 332. 



THE CORPORATION TAX 667 

A comparison between bank stock and other kinds of property 
shows an injustice perhaps even more flagrant. With the in- 
formation at his disposal it is an easy matter for the assessor 
to arrive at the full value of bank stock. Evasion and under- 
assessment are practically impossible except with the consent of 
the assessor. In the case of other kinds of property evasion and 
under-assessment are the rule. Even where some attempt is made 
to scale down the value of bank stock, the process is seldom if 
ever carried far enough to produce justice. Cases have been re- 
ported in Illinois of banks assessed on their full book value and 
farm lands at 20 per cent. An inquiry made in Missouri in 191 1 
showed instances of bank stock assessed two or three times as 
heavily as other forms of property. In some counties live-stock 
was assessed as low as 15 per cent, merchandise 20 per cent, real 
estate 10 per cent, but in only one county was bank stock as- 
sessed at less than 50 per cent. It is said that in some counties 
of Minnesota 60 per cent of the entire personal-property tax is 
paid by banks and that in some of the cities of Wisconsin banks 
pay from 15 to 30 per cent of the total personal-property tax. 
At one time the board of equalization of New Mexico officially 
recommended to the county assessors that all property be re- 
turned at actual cash value and that the assessment be 50 per cent 
of this valuation for bank stock and 35 per cent for real estate 
and personal property. It is claimed that in North Carolina real 
estate is valued at from one tenth to one half of its actual value, 
whereas bank stock is frequently assessed at a higher value than 
that at which it could be sold. In North Dakota it is reported 
that real estate and personal property are assessed at from 15 to 
25 per cent of their value, while bank stock is assessed all the way 
from 25 to 70 per cent, according to the personal inclination of 
the county officials.^ 

There can be no doubt that as a general rule the assessment of 
bank stock is very much nearer actual value than that of other 
personal property or even real estate. Since bank stock must 
bear the regular rate of the general-property tax, it is obvious 
that it bears an unjust burden of taxation. That local taxation 
of bank stock is flagrantly unjust as between different banks 
and as between bank stock and other kinds of property cannot 

1 For further details of these and similar instances, c/. Paton, q^. cit. 



668 SELECTED READINGS IN PUBLIC FINANCE 

be questioned. This method might be dismissed with summary 
condemnation were it not for the fact that it is the method ac- 
tually employed in many states and that attempts to remedy its 
injustice are being made which deserve critical analysis. 

The remedy nearest at hand is obviously to require the as- 
sessor to scale down the value of bank stock so as to make it 
correspond with the prevailing under-assessment of other kinds 
of wealth. We have seen that assessors have sought to secure 
some measure of justice in this way. In many states the bankers 
have offered this as their suggestion for reform. The bankers of 
Indiana expressed themselves as fairly well satisfied when a uni- 
form rule of assessing bank stock at 75 per cent of the capital, 
surplus, and undivided profits was adopted. Likewise in Iowa 
the bankers appeared to be fairly content with a rule of 20 per 
cent of actual value. In Missouri a committee of bankers has 
devoted itself to urging the state board of equalization and the 
various county boards to reduce the basis of assessment upon 
bank capital and has succeeded in obtaining slight reductions. 
In Kentucky the bankers succeeded in persuading the state 
board of equalization to cut the assessment of bank shares down 
to 80 per cent of capital, surplus, and undivided profits. In 
Nevada the state bankers' association presented the argument 
that "undivided profits cannot be considered a fixed investment, 
but rather a fund to meet expenses and such losses as the bank 
may sustain in the conduct of its business, and that to a certain 
extent the surplus fund should be considered in like manner." 
As a result the state tax commission agreed to eliminate un- 
divided profits and assess only 75 per cent of the surplus. The 
economist will feel more sympathy with the result than with 
the argument by which it was obtained.^ 

There is little reason to hope that justice will be secured 
through the attempt to scale down the assessment of bank stock. 
The most that can be expected from this remedy is a palliation 
of the evil. The principal reason why bank shares are assessed 
at their true value is that it is so easy to ascertain the true value. 
Other property is often under-assessed on account of the diffi- 
culty of knowing what its value actually is. In most states the 
,law positively requires the assessment of all property at its full 
value. Although much property is not actually so assessed, the 

1 For further details regarding these and other examples, cf. Paton, op. cit. 



THE CORPORATION TAX 669 

under-assessment is done more or less furtively and is not openly 
admitted. In the case of bank stock, however, it is practically 
impossible to put in any value except the real one without openly 
admitting an intentional under-assessment. 

Some states, it is true, have seen this difficulty and have 
recognized in their statutes the prevailing under-assessment and 
required that bank shares be entered at values corresponding to 
the assessment of other kinds of wealth. In other states the 
same result has been accomplished by administrative action 
of tax commissioners or boards of equalization, and of course 
the local assessors exercise some discretion in the same way. 
Examples have been given above. In none of these cases, how- 
ever, is more than a compromise probable. Neither by statute 
nor by administrative discretion is it likely that the full extent 
of prevailing under-assessment will be openly recognized. The 
result is to decrease somewhat the injustice against the banks, 
but not to remove it. 

Justice might be obtained by the opposite process, namely, 
by raising the assessment of other kinds of property up to full 
Value, — a process which would, of course, soon be followed by a 
lowering of tax rates. This result would be eminently desirable 
from ever}^ point of view. That it is likely ever to be generally 
accomplished is open to grave doubt. The whole history of the 
general-property tax has shown overwhelming forces leading to 
under-assessment of property. If these motives could be counter- 
acted and all property actually assessed at its full value, one of 
the greatest difficulties of the tax would be removed. Under the 
American general-property tax in anything like its present form 
the motives for under-assessment are likely to remain too strong. 

In short, the difficulties in the taxation of bank stock under 
local administration are inherent in the general-property tax it- 
self, and attempts to bring relief by securing under-assessment of 
bank stock or full-value assessment of other kinds of wealth are 
bound to be futile, being able at the best to accomplish only a 
slight palliation of the present injustice. 

We have now to consider the taxation of bank stock under 
methods prescribed by state laws which require uniformity 
throughout the state. Here the administration is generally in the 
hands of state officers, although the returns may be distributed 
either to the towns of residence of the stockholders or to the 



6/0 SELECTED READINGS IN PUBLIC FINANCE 

towns where the several banks are located, or kept by the state. 
The two important problems here are the basis of assessment and 
the rate. 

Of the various methods of valuing bank shares two are of 
special importance and deserve our careful examination. Shares 
of stock in banks may be valued for purposes of taxation either 
at their market value or at their book value. Under the theory 
of the general-property tax, market value is apparently the logi- 
cal basis. Our local tax systems are still founded upon the 
general property tax. The problem is to bring the method of 
taxing bank shares into the greatest possible harmony with the 
present taxation of other kinds of wealth. The general-property 
tax assumes that all kinds of taxable property will be assessed 
at their true or actual value, which is practically synonymous 
with market value. Justice would therefore seem to require that 
bank stock be assessed at its market value. 

The objections to market value as a basis for assessing bank 
stock are of a practical nature and arise from the difficulty of 
finding out what actually is the market value of the shares. 
There are, of course, many large city banks whose shares are 
regularly dealt in on the market. The market value is then a mat- 
ter of public knowledge, and there is no difficulty in determining 
it for purposes of taxation. However, this is the exception rather 
than the rule. Most bank shares are not regularly bought and 
sold. Many banks, are owned by small groups of men, and the 
stock is rarely exchanged. When sold it is apt to be by private 
arrangement between members of the inside group on terms 
which are not known to outsiders and which even if known 
might not fairly represent the actual value of the stock. The 
sales of stock of small local banks are so infrequent as to 
furnish no reliable indication of the value of the stock. The law 
requiring an assessment of the market value of stock imposes 
a very difficult burden upon the officer charged with the duty 
of assessment. In the majority of cases he is unable to find any 
quotation of actual market values and is forced to rely upon 
reports of brokers or statements furnished by the officers of 
the banks themselves. Ordinarily he has to estimate a fair 
market value from examination of the balance sheets and earn- 
ings of the banks. This introduces the element of personal 
judgment and is a fruitful cause of argument and dispute with 



THE CORPORATION TAX 6/1 

the representatives of the banks, all of which leads to friction, 
hard feeling, and inefficient assessment. 

The argument is sometimes urged that market value, even 
when discovered, does not always represent the real value of 
the stock. Stock values are subject to fluctuations upon the 
market. These fluctuations may in general be assumed to rep- 
resent changes in the condition of the bank and therefore in the 
real value of the shares, but they may also be caused by cir- 
cumstances entirely foreign to the bank's condition, such as 
the situation of the money market, etc. It is also held that 
shares of stock in banks are often sold at prices far above their 
real value, due to sentimental reasons. There is great danger 
of exaggerating the importance of these objections, but such 
weight as they have simply strengthens the case against the 
use of market value. The real objection to market value, how- 
ever, is the difficulty of determining it, and it is this considera- 
tion which furnishes the principal argument in favor of the 
assessment of bank stock at its book value. 

Book value is a definite fact, easily determined from the 
balance sheet of any bank. The value of a share may ordinarily 
be determined by adding the capital, surplus, and undivided 
profits and dividing by the number of shares. This method of 
valuing bank shares does away with the difiiculties inherent in 
the market-value basis. In the place of uncertainty, dispute, 
and guesswork, it substitutes a certain method, easy of ad- 
ministration. The book value is a definite thing, shown at any 
time by the balance sheet of the bank, and the room for argu- 
ment or difference of opinion is reduced to a minimum. The 
book value is not subject to frequent fluctuations due to the 
condition of the money market or other external causes. 

Certain objections have been raised to the use of book value as 
a basis of assessing shares of bank stock. In the first place, it is 
claimed that market value is the only true value, that all other 
values are more or less arbitrary, and that the real value of any- 
thing is the amount a purchaser is willing to pay for it. There 
is considerable truth in this contention, and it might furnish a 
valid case against the use of book value were it not for the im- 
possibility of determining market value, already demonstrated. 

The question remains whether book value does actually repre- 
sent the true value of stock or whether it is arbitrary and subject 



6/2 SELECTED READINGS IN PUBLIC FINANCE 

to manipulation. In particular, it is charged that by changing 
the valuations set upon its assets a bank may make its book value 
what it pleases. The officers of the bank may write off certain 
assets and put others in at lower figures so as materially to reduce 
the book value and evade taxation. While this procedure is of 
course open to the officers of any bank, it does not appear likely 
that it would often be availed of to escape taxation. The motives 
leading the ordinary bank officer to make as good a statement as 
he can of his bank's condition will generally be strong enough to 
prevent the scaling down of book value below the real value of 
assets merely to save a few dollars in taxation. On the other 
hand, if the use of book value should lead some banks to 
write off doubtful assets or reduce assets previously carried at 
inflated figures, the result would certainly be a desirable one and 
would not lead to any real evasion of taxes.^ 

The only methods of assessment deserving serious considera- 
tion are the two that have just been discussed. Certain states 
have adopted methods departing more or less from these two, 
but usually with unfortunate results. New Jersey, for example, 
formerly determined the value by deducting from capital, sur- 
plus, and undivided profits the assessed value of real estate and 
the book value of all non-taxable securities owned by the bank. 
The latter provision allowed a very great reduction from book 
value, and many banks were able to show non-taxable securities 
equal to their total capital, surplus, and undivided profits, so 
that they paid no tax at all except upon their real estate. In a 
number of cases banks have been actually ashamed to get off so 
easily and have permitted an assessment and paid taxes which 
they knew were not enforceable.^ The somewhat similar ex- 
perience of California is referred to below. xAs has been shown, 
the federal statute does not require the deduction of tax-exempt 
property or even of property which is elsewhere taxed. There 
is no reason why such deduction should be allowed. 

1 Regarding the relative merits of book value and market value, cf. Proceedings 
of the National Tax Association, Vol. IV, pp. 391-401 ; Report of the Commission on 
Revenue and Taxation of California, 1906, pp. 244-247; Report of the Connecticut 
Co7nmission on Taxation of Certain Corporations, 1913, pp. 130—135. 

2 Cf. Report of the New fersey Board of Equalization of Taxes, 1910, pp. 19-21, 
and 191 1, pp. 21-22; also Proceedings of the Natio7ial Tax Association, Vol. VII, 
pp. 318-319, 340-341. 



THE CORPORATION TAX 673 

Some states having assessed the stock at market or book vakie 
then proceed to scale the assessment down to a certain percent- 
age. For example, under the Ohio law the state board of equali- 
zation assesses the book value and then fixes the assessment at 
60 per cent.^ Something of this sort is a necessity for the sake 
of justice, if bank stock is to be taxed at the same rate as other 
property. A more effective way of securing justice, however, is 
to make allowance for this in a uniform rate fixed by law. This 
brings us to the matter of the rate. 

There are three ways of determining the rate of the tax on 
bank shares. First, to impose upon each bank the local rate of 
the general-property tax in the town where it is located. Second, 
to impose upon the banks a uniform rate equal to the average of 
the local rates of the general-property tax throughout the state. 
Third, the law itself may prescribe a uniform rate to be imposed 
upon all banks. 

The first method leaves many of the evil results of local ad- 
ministration unremedied, although assessment may be just and 
uniform throughout the state. The actual burden of taxation 
will be unequal on account of different local rates. In particular, 
bank stock, being assessed at practically its full value, will be 
subject to an excessive tax as compared with other property. 
The only way to correct this is to make the assessment a cer- 
tain fraction of the actual value, as is done in Ohio. This can- 
not secure justice for two reasons. It is practically certain that 
the reduction will not be enough to offset the prevailing under- 
assessment of other property, and even if this were done on the 
average, there would remain injustice on account of the varying 
degree of under-assessment in the different localities. 

If instead of a tax on each bank at the local rate there is 
imposed upon all banks a tax at a uniform rate equal to 
the average of the general-property tax, uniformity is secured 
for all banks throughout the state. There still remains, how- 
ever, the excessive burden upon bank stock as compared with 
other kinds of property, unless this is met by reduced assess- 
ment of bank stock to meet the prevailing under-assessment 
of property. In theory this would be a possibility, but prac- 
tically there is little reason to expect a reduction sufficient to 
secure justice. 

^ Report of the Ohio Tax Commission^ 1908, p. 12. 



6/4 SELECTED READINGS IN PUBLIC FINANCE 

The only effective way of securing uniformity and at the 
same time equaUty as between bank stock and other kinds 
of wealth is to fix a definite rate low enough to make the tax 
paid by the owners of bank shares fairly correspond to the 
burden of taxation placed upon other kinds of wealth. Inves- 
tigation of this matter has generally led to the conclusion that 
I per cent is a reasonable rate. This is the rate in New York 
and Connecticut. The California rate was originally made i 
per cent in 191 1, but was raised to 1.2 per cent in 191 5. The New 
Jersey rate is ^. of i per cent. Pennsylvania gives the banks 
the choice between a rate of 4 mills! upon book value and 10 
mills upon par value of stock. The 4-mill rate is extremely low, 
and there appears to be no justification for the alternative lo-mill 
rate, whose chief eft'ect is to cause injustice between large and 
small banks.^ 

In addition to the taxation of shares of stock, real estate 
owned by banks may lawfully be taxed and generally is so taxed. 
There appears no good reason why local taxation of bank real 
estate should not continue. It is probably also reasonable to 
leave the taxation of real estate in the hands of the local officers 
rather than to attempt to secure any uniform assessment or 
uniform rate throughout the state. 

It is obvious that if the shares of stock are taxed at their full 
value by a rate which equalizes the burden with that borne by 
other kinds of wealth, and at the same time local taxation of 
real estate is allowed, double taxation results. As has been shown, 
such double taxation is not repugnant to the federal statute. 
New York expressly permits it and there is little complaint. In 
strict justice, however, some allowance should be made. Three 
methods are possible. 

First, allow the bank to deduct from the tax paid upon its 
shares of stock the amount of local taxes paid upon real estate. 
This is the Connecticut method. It makes the tax on shares of 
stock measure the total burden of taxation. It produces justice 
so far as the shareowners are concerned. A difficulty remains, 
however, in that the banker loses all interest in the assessment 
and taxation of his real estate, and the door is opened for exces- 
sive assessment of such real estate without any protest on the 
part of the banker, as a result of which the local government 
1 Proceedings of the National Tax Association^ Vol. VI, p. 159. 



THE CORPORATION TAX 675 

may secure more revenue than it is entitled to at the expense 
of the state revenue/ 

A second method is to deduct from the valuation of shares of 
bank stock the assessed value of real estate, as is done in Cali- 
fornia. This accomplishes practically the same result as the first 
method. To a certain extent it is open to the same objection, 
although there is here some motive leading the banker to see that 
his real estate is not over-assessed. The local tax rate will nor- 
mally be higher than the rate fixed for the tax upon bank shares. 
A banker, therefore, loses more through an excessive valuation 
of his real estate than he can gain by having that valuation de- 
ducted from the assessed value of the shares of stock. To this 
extent only will he be induced to use his influence against over- 
assessment of his real estate. There still remains to some 
degree the same opportunity for the towns to profit at the 
expense of the state. 

The third method is to allow the unrestricted local taxation of 
real estate without deduction either from the amount of the tax 
or the assessed value of the shares of stock, but to make the cor- 
rection by taking the real-estate tax into account when determin- 
ing the rate of the tax upon the stock. It is easy to find the 
total amount of taxes paid by banks upon their real estate and 
to make a corresponding reduction in the uniform rate fixed for 
the tax upon bank shares. This is doubtless the best method. It 
protects the state revenue, it leaves each banker to safeguard his 
own interests as against the local assessors, and on the average 
it places a just burden of taxation upon the owners of bank stock. 
It may be objected that, while the average burden is just, injustice 
may be done in the case of certain bankers with large holdings of 
real estate. This objection need not be given much consideration. 
The ordinary commercial bank should not invest largely in real 
estate. If a bank does so, it adopts the course because it sees 
some advantage in it, in which case it should be able to bear the 
tax burden necessarily involved. 

The foregoing analysis would seem to demonstrate that sat- 
isfactory results in! the state and local taxation of banks are 
possible under a method whose main features may be briefly 
summarized as follows. 

^ Cf. Report of the Connecticut Commission on Taxation of Certain Corpora- 
tions, 19 1 3, pp. 134-135' 174- 



6^6 SELECTED READINGS IN PUBLIC FINANCE 

A uniform tax is prescribed by state law. The tax is upon the 
book value of the shares of stock, which is obtained by adding 
together the capital, surplus, and undivided profits and dividing 
by the number of shares. No deduction need be made on account 
of property exempt from taxation or elsewhere taxed, with the 
possible exception of real estate. The rate of the tax is uniform 
throughout the state and definitely fixed in the law. The exact 
rate is a detail to be determined according to the circumstances 
in the given state. It appears that in general i per cent is a 
fair rate. Administration is preferably in the hands of state 
officers, although satisfactory results are obtainable under local 
administration. The tax is collected from the bank, acting as 
agent of the stockholders. The proceeds may go into the state 
treasury, or be distributed to the towns or counties according to 
the locality of the banks or the residence of the shareholders. 
Real estate belonging to banks is subject to local taxation like 
other real estate. Allowance for the local tax on real estate may 
be made in either of the three following ways, stated in the order 
of preference: (i) by a slight reduction in the rate of the tax 
upon shares, (2) by deducting the assessed value of real estate 
from the book value of the shares, or (3) by a deduction of the 
tax paid on real estate from the amount of the tax on shares. 
Of course the shares of stock are exempt from taxation in the 
hands of the owners. 

This method, if applied to all commercial banks and trust 
companies, is in harmony with the federal statute, is certain 
and effective in administration, and should give substantial 
justice to all concerned. Some of the states have already 
approached very close to the method here indicated and others 
are tending that way. A glance at a few examples will be 
worth while. 

The state of New York furnishes the best example of the 
method which has been recommended. The present law was 
enacted in T901. Previous to that time bank shares were as- 
sessed locally. There was no fixed rule for their taxation, which 
was left to the judgment of the local assessors. An investiga- 
tion made in 1899 by Mr. Charles Adsit, president of the New 
York Bankers' Association, showed that the assessment in dif- 
ferent parts of the state varied all the way from 10 per cent to 
119 per cent of the capital, surplus, and undivided profits. It was 



THE CORPORATION TAX 6'JJ 

also shown that banks were discriminated against as compared 
with trust companies, the average rate of taxation upon banks 
being about five times as great as that upon trust companies. 
Another result was that shares of bank stock were very un- 
justly burdened as compared with other kinds of personal 
property. In one city of 13,000 people the banks, with capital 
of $250,000, paid three fourths of the total personal-property 
tax, although more than one individual residing in the city 
owned more than the combined capitals of the banks and yet 
escaped personal taxation entirely.^ 

The essential features of New York's present system of taxa- 
tion are as follows : ^ Each bank must report annually to the 
assessors of the tax district in which it is located, giving a list 
of its stockholders, their residences, and the number of shares of 
stock owned by each, together with all essential facts regarding 
its capital, surplus, and undivided profits. Assessment is made 
by the assessors of the tax district. The shares are assessed to 
the owners in the tax district where the bank is located, re- 
gardless of the residence of the stockholders. The law provides 
that the value of each share shall be determined by adding the 
capital, surplus, and undivided profits and dividing by the num- 
ber of shares. The rate is fixed in the statute at i per cent of 
this assessed value. Owners are entitled to no deduction for 
debts or other causes. The tax is in lieu of all other state and 
local taxes on the shares of stock, and no state or local taxes are 
allowed upon the personal property of the banks. The tax is 
payable to the county treasury and is distributed to the various 
tax districts in proportion to their tax rates. In paying the tax 
the bank acts as the agent of the stockholders, from whom it is 
assumed to collect the amount paid. The bank has a lien upon 
shares of stock and any other property of the shareholders in its 
hands for reimbursement of taxes so paid. Real estate belonging 
to banks is subject to local taxation, and no deduction from the 
value of the shares of stock is allowed on account of taxes on real 
estate. The rate of i per cent is assumed to be enough lower than 
the ordinary rates of the general-property tax so that no injustice 
is caused by this additional taxation of real estate. This law has 
given general satisfaction. 

1 Paton in Proceedings of the National Tax Association, Vol. VII, p. 316. 

2 N. Y. Tax Law, sects, 13, 14, 23-26, 183, 188, 189, 191, 205. 



678 SELECTED READINGS IN PUBLIC FINANCE 

New Jersey, after suffering for years under the defective sys- 
tem described above, has now a tax drawn on correct hnes.^ The 
new law is practically the same as the New York method except 
that the assessed value of real estate is deducted from the value 
of the shares and the rate is ^ of i per cent. 

Connecticut taxes banks and trust companies upon the market 
value of their shares of stock as determined by the state board of 
equalization.^ The rate of the tax is fixed in the state law at i 
per cent. From the amount of the tax thus determined is de- 
ducted the tax paid on real estate in Connecticut. The tax is col- 
lected by the state and distributed to the towns in which the 
stockholders reside. The state retains the part paid on shares 
owned by persons residing outside the state, except that in the 
case of a national bank the tax on shares owned by non-residents 
is paid to the town in which the bank is located, as is required 
by the federal statute. The principal defect in the Connecticut sys- 
tem is the market-value basis of assessment. Connecticut has ex- 
perienced in the administration of this law most of the difficulties 
which have been mentioned above in connection with this basis. 

Pennsylvania taxes the shares of bank stock under a state law 
administered by state officers.^ The basis of valuation is the capi- 
tal, surplus, and undivided profits. The tax is assessed as to 
the stockholders but is paid by the banks. Real estate is taxable 
locally. Banks have the option of paying at the rate of 4 mills 
upon the above value or at the rate of i per cent on the par value 
of the stock alone. The tax is in lieu of all local taxation except 
taxes on real estate. The peculiarities of the Pennsylvania tax 
are the low rate and the optional feature. There appears to be 
no justification of the optional rate, and the normal 4-mill rate 
is about half of the tax paid by banks in other states where a 
uniform rate is fixed by law. 

The state of California has had an interesting experience in 
the taxation of banks.* Until 1910 the state constitution required 

1 Laws of 19 1 4, ch. 90. 

2 Gen. Stat. sect. 2331, as amended by Acts of 1903, ch. 204, Acts of 1905, 
ch. 54 ; sect. 2332-2335. 

3 Act of July 15, 1897.' (P. L. 292.) 

^ Report of the California Commission on Revemce and Taxation, 1906, pp. 219- 
229. The entire chapter on Taxation of Banks in this report, pp. 219-253, is 
very valuable. 



THE CORPORATION TAX 679 

the taxation of all property in the state under a uniform rule. 
The law made banks taxable upon all of their property exactly 
like natural persons. This law was contrary to the provisions of 
the federal statute relating to the taxation of national banks. 
At first no serious difficulty resulted, as there were very few 
national banks in the state. During the period from 1890 to 1896 
several new national banks were established and a number of 
state banks went into the national system, the reason being 
primarily to evade state taxation, since they realized that as 
national banks they could not be taxed upon their property. 

To correct this situation the legislature in 1899 provided for 
the taxation of shares of stock in national banks in conformity 
with the federal statute, but further allowed stockholders to 
make from the amount of their shares of bank stock all the de- 
ductions permitted by law to the holders of moneyed capital in 
the form of solvent credits. Deduction was also allowed for real 
estate taxed and for all property exempt by law from taxation. 
At first this system seemed to promise well. Very soon, however, 
the banks realized that under the deductions allowed they could 
generally show exemptions exceeding the value of the stock and 
thus escape taxation entirely. Still worse, the federal courts 
decided in 1905 that, since national banks were taxed upon their 
shares of stock and state banks upon their property, this in- 
volved a discrimination against national banks in favor of state 
banks. It was therefore held that the law was invalid for the 
taxation of national banks. From that time on national banks 
were not subject to any taxation whatever except upon their 
real estate. A few of the national banks, realizing this situation, 
voluntarily submitted to an assessment which they knew was not 
legally enforceable and paid a certain amount of taxes. Obviously 
such voluntary taxation was not sufficient to produce any large 
revenue or to equalize the burden of taxation between state and 
national banks. 

During all of this time the taxation of state banks also was 
unsatisfactory. They were taxable directly upon all their prop- 
erty in the same manner as individuals. Since, however, they 
were allowed to deduct debts, which included all of their de- 
posits, the principal item of assets, loans, and discounts, was 
very frequently wiped out entirely by the deduction of deposits. 
Various other items of the banks' assets were incapable of ac- 



68o SELECTED READINGS IN PUBLIC FINANCE 

curate assessment, and, finally, there was a great lack of uni- 
formity in the practice of the local assessors. As a result, some 
banks practically escaped taxation entirely, others were severely 
penalized, and the whole system was marked by inequality, un- 
certainty, and justice. 

In 1905 the whole matter was referred to a special state tax 
commission. As a result of their recommendations the constitu- 
tion was amended in 1910, allowing classification of property for 
purposes of taxation, and in 191 1 the legislature enacted a law,^ 
under which all shares of stock of banks are assessed and taxed 
to the owners by the state board of equalization in the town or 
city where the bank is located. The value of the shares of 
stock is the amount paid thereon plus a pro rata share of the 
surplus and undivided profits. The tax is in lieu of all other 
state and local taxes upon the shares of stock and upon the prop- 
erty of the banks except real estate which is subject to local 
taxation like other real estate. From the value of the shares, 
determined as above, is deducted the assessed value of real estate. 
The remainder is the assessed value of the shares and is taxed 
annually at a uniform rate of 1.2 per cent. The tax is paid by 
the bank to the state in behalf of the stockholders. The bank 
has a lien upon the shares of stock and upon the dividends for 
reimbursement. With this law California has satisfactorily solved 
the problem. 

1 Acts of 191 1, ch. 335, sects, i, 4, 12, and 18, as amended by Acts of June, 
1913, and Jan. 28, 1915. 



CHAPTER XVIII 

THE INHERITANCE TAX 

76. State Inheritance Taxes in the United States : The Special 
Report of the Board of Tax Commissioners of Rhode Island.^ — 

State inheritance taxes are well treated in the following extract 
from a special report of the Rhode Island Tax Commission: 

Early State Inheritance Taxation 

Pennsylvania was the first state to impose an inheritance tax; 
the law which was passed in 1826, although amended several 
times, remains practically as it was enacted. This law provided 
for a uniform rate of 5 per cent and an exemption of $250, and 
it did not apply to the inheritances of a father, mother, husband, 
wife, child, step-child, lineal descendant, and daughter-in-law. 
The law recognized the situs of personal property as the domicile 
of the owner, and did not impose a tax on the stock of domestic 
corporations owned by a non-resident decedent, and did not tax 
the securities of a foreign corporation owned by a non-resident 
decedent, even when such securities were kept within the state. 

Louisiana was the second state- to impose an inheritance tax. 
The law was enacted in 1828, was repealed in 1830, revived in 
1842, and remained in force until 1877. The tax was imposed at 
the rate of 10 per cent on property passing to non-resident 
aliens. An attempt w^as made later, in 1894, to revive the statute 
of 1828, but the law was declared unconstitutional. The constitu- 
tion was amended in 1898, limiting the power of the legislature 
in respect to inheritance taxation, fixing the maximum rate at 
3 per cent for direct and 10 per cent for collateral heirs. Louisiana 
now has an inheritance-tax law which provides for a tax of 2 per 
cent on direct heirs, with an exemption of $10,000, and a 5 per 
cent tax on collateral inheritances with no exemption ; the tax not 
to be operative, however, if it can be shown that the property 
has borne its just share of taxes prior to donation or inheritance. 
^ Special Report on New Sources of Revenue. Providence, 1916. 

681 



682 SELECTED READINGS IN PUBLIC FINANCE 

Virginia in 1844 imposed a collateral inheritance tax on 
estates of $250 or more passing to persons other than the 
decedent's father, mother, husband, wife, brothers, sisters, or 
lineal descendants. The law required the rates to be fixed by 
the legislature at each session, and the law was held to have 
been repealed because the legislature omitted to fix the rate in 
1856. A collateral inheritance tax was again imposed in i860, 
and with varying rates and periodic suspensions it continued in 
force until 1884, when it was repealed. A collateral inheritance 
tax was reimposed in 1896. Parents, grandparents, husband, 
wife, brothers, sisters, and lineal descendants were exempt and 
also certain bequests for public, educational, benevolent, and 
religious purposes. 

Taxation of Direct and Collateral Heirs 

The following states adopted collateral inheritance-tax laws 
which did not provide for the taxation of direct heirs, in the 
order named : 

Pennsylvania, 1826; Virginia, 1844; Maryland, 1845; North 
Carolina, 1847; Alabama, 1848; Delaware, 1869; New York, 
1885 ; West Virginia, 1887 ; Connecticut, 1889 ; Massachusetts, 
1891 ; Tennessee, 1891; New Jersey, 1892; Ohio,^ 1893; Cali- 
fornia, 1893; Maine, 1893; Vermont, 1896; Iowa, 1896; Missouri, 
1899; Arkansas, 1901 ; North Dakota, 1903; New Hampshire, 
1905 ; Kentucky, 1906 : Texas, 1907 ; Kansas,^ 191 5- 

Eleven of the twenty-two states which originally imposed 
collateral inheritance taxes have not extended the tax to direct 
heirs : Alabama,^ Delaware, Iowa, Kentucky, Maryland, Mis- 
souri, New Hampshire, Pennsylvania, Texas, Vermont, and 
Virginia. 

Eleven states which originally had collateral inheritance taxes 
only have extended them to include direct heirs : Arkansas, Cali- 
fornia, Connecticut, Massachusetts, Maine, New Jersey, New 
York, North Carolina, North Dakota, Tennessee, and West 
Virginia. 

Two states, Kansas and Ohio, taxed direct inheritances origi- 
nally, but now restrict the tax to collaterals and strangers. 

^ Had law providing for a tax on direct inheritances prior to date here given. 
2 Repealed in 1868. 



THE INHERITANCE TAX 683 

There are twelve states which at present tax only collaterals : 
Delaware/ Iowa, Kansas/ Kentucky, Maryland, Missouri, New 
Hampshire, Ohio, Pennsylvania, Texas, Vermont, and Virginia. 

Nineteen states have enacted laws imposing both direct and 
collateral inheritance taxes at the same time : Colorado, Georgia, 
Idaho, Illinois, Indiana, Kansas, Michigan, Minnesota, Montana, 
Nebraska, Nevada, Ohio, Oklahoma, Oregon, South Dakota, 
Utah, Washington, Wisconsin, and Wyoming. 

Ohio^ was the first state to tax all classes of property passing 
to direct heirs and also the first to apply progressive rates. The 
law which was passed in 1894 was held unconstitutional the year 
after its passage because of the progressive feature and certain 
provisions regarding the exemption of $20,000. In 1904 a direct 
inheritance tax was imposed at the rate of 2 per cent with a $300 
exemption. This act was repealed in 1906. At present collateral 
inheritances only are taxed at 5 per cent with an exemption of 
$200. 

A tax on direct inheritances has been applied in the following 
states in the order named : 

New York, 189T — direct tax applied to personal property only, 
extended to realty in 1903 ; Illinois, 1895 ; Connecticut, 1897 ; 
Montana,^ 1897; North Carolina, 1897; Louisiana, 1898; Michi- 
gan, 1899 — direct tax applies to personal property only; Colo- 
rado, 1901 ; Nebraska, 1901 ; Utah, 1901 ; Washington, 1901 ; 
Oregon, 1903 ; Wisconsin, 1903 ; Wyoming, 1903 ; Ohio, 1904 — 
repealed 1906, collaterals only taxed since 1906 ; California, 1905 ; 
Minnesota, 1905; South Dakota, 1905; Arkansas, 1907; Idaho, 
1907; Massachusetts, 1907; Oklahoma, 1907 — invalid, new law 
1915; West Virginia, 1907; Kansas, 1909 — repealed, 1913, col- 
laterals only taxed since 191 5; Maine, 1909; Tennessee, 1909; 
Arizona, 1912; Georgia, 1913 ; Indiana, 1913; Nevada, 1913 ; 
North Dakota, 1913 ; New Jersey, 1914. 

1 Delaware taxed only strangers in blood, 1 883-1 899. Kansas taxed both 
direct and collaterals, 1909-1913. 

2 The Louisiana law of 1828 provided for a tax on property passing to non- 
resident aliens, regardless of relationship. The New York law of 1891-1903 
taxed personalty passing to direct heirs. 

3 Law apparently intended to exempt real estate passing to direct heirs, but 
the wording of the statute is obscure, and by strict interpretation said real estate 
so passing is exempt to all direct heirs except father, mother, husband, and wife ; 
these are taxed at the collateral rate of 5 per cent. 



684 SELECTED READINGS IN PUBLIC FINANCE 

The thirty states which at present tax both direct and collateral 
inheritances are Arizona, Arkansas, California, Colorado, Con- 
necticut, Georgia, Idaho, Illinois, Indiana, Louisiana, Maine, 
Massachusetts, Michigan, Minnesota, Montana, Nebraska, 
Nevada, New Jersey, New York, North Carolina, North Dakota, 
Oklahoma, Oregon, South Dakota, Tennessee, Utah, Washing- 
ton, West Virginia, Vv^isconsin, and Wyoming. 

Kansas and Ohio each have had taxes on direct inherit- 
ances which have been repealed and never reenacted. Alabama 
had a collateral inheritance tax, 1848-1868. The constitution 
of Alabama, adopted in 1901, imposes restrictions upon the 
legislature prohibiting the taxation of inheritances of father, 
mother, husband, wife, brothers, sisters, children, and lineal 
descendants, and limits the rate on taxable inheritances to 2^^ 
per cent. 

The inheritance-tax law of Kansas, adopted in 1909, was re- 
pealed in 1913 apparently for purely political reasons. In 1915 
a law imposing a tax on collateral inheritances was adopted. 
This law provides for three classes : the first class, consisting of 
husband, wife, lineal ancestor, lineal descendant, adopted child, 
lineal descendant of same, son-in-law, or daughter-in-law, is 
not taxed ; the second class, brothers and sisters, is allowed 
an unconditional exemption of $5000, with rates from 3 to 
12^ per cent ; third class, all others, no exemption and the rates 
are from 5 to 15 per cent. It is further provided that shares 
which net less than $200, after all deductions allowed are made, 
are not taxed. 

Constitutionality of State Inheritance-Tax Laws as 
affected by specific constitutional provisions 

Inheritance-tax laws have been declared unconstitutional in 
many states because of their failure to conform to the restric- 
tions and limitations imposed by the rule laid down in their 
constitutions that taxes shall be uniform and equal according 
to value. 

The difficulty, under such constitutional restrictions, of formu- 
lating an equitable inheritance tax, which according to modern 
ideas and practice should provide for classified rates and exemp- 
tions as well as recognized degrees of relationship, is apparent. 



THE INHERITANCE TAX 685 

The necessity of exempting small estates passing to direct heirs, 
and the desirability of progressive rates, and exemptions and 
classification in accordance with degrees of relationship, im- 
pelled legislators to incorporate these features in their laws, and 
the courts when appealed to on the grounds of constitutionality, 
while recognizing the right of the law-making body to impose 
inheritance taxes, in numerous cases declared the laws unconsti- 
tutional. The constitutional limitations on the law-making bodies 
applied to collateral as well as direct inheritances. 

In New Hampshire, after operating under a collateral 
inheritance-tax law for four years, 1878- 1882, the law was de- 
clared unconstitutional ; later, in 1903, the constitution was 
amended, and the present law taxing collateral inheritances was 
passed in 1905. 

Minnesota seems to have had the greatest amount of difficulty 
in complying with its constitutional provisions ; the inheritance- 
tax laws of 1897, 1901? 3-rid 1902 were in turn declared uncon- 
stitutional, and the law of 1905 survived after considerable 
litigation. The question seems to have been settled by an amend- 
ment to the Constitution in 1906 which extended the powers of 
the legislature in the taxation of inheritances. 

The Oklahoma law of 1907 was practically declared invalid, 
and a new law was passed in 191 5. Missouri attempted to tax 
collateral inheritances in 1895, but the law was declared uncon- 
stitutional ; later, in 1899, a law taxing collaterals was passed 
and is still in force. In South Dakota the law was declared 
unconstitutional, but upon rehearing was sustained. 

The direct inheritance-tax law of Ohio was declared unconsti- 
tutional because of progressive rates and the exemption of estates 
of $20,000 or less, but the court ventured the statement that if 
that exemption or any other exemption had applied to every 
estate, it would have been valid ; it was the inequality of the 
exemption, not the fact of an exemption alone, which was the 
determining factor. 

Pennsylvania's direct inheritance-tax law was declared uncon- 
stitutional because of the exemption of $5000. In Tennessee a 
similar objection was not sustaine'd. 

The Wisconsin law of 1899 was declared unconstitutional 
because the exemption depended upon the size of the entire 
estate and not upon the separate shares. The Massachusetts 



686 SELECTED READINGS IN PUBLIC FINANCE 

Supreme Court on the same point under a similar exemption said : 

The exemption in the statute under consideration is certainly large as an 
exemption of estates, but it is peculiarly within the discretion of the legis- 
lature to determine what exemptions should be made in apportioning the 
burdens of taxation among those who can best bear them, and we are 
not satisfied that this exemption is so clearly unreasonable as to require 
us to declare the statute void.^ 

In the same case the court sustained the right to distinguish 
between direct and collateral heirs and strangers in blood, both 
as to rates and exemptions, saying that the principle had the 
sanction of practice and reason. 

Constitutional Difficulities at a Minimum in 
Rhode Island 

The constitution of Rhode Island in relation to taxation says 
"and the burdens of the state ought to be fairly distributed 
among its citizens"^ and "the general assembly shall, from time 
to time, provide for making new valuations of property, for the 
assessment of taxes, in such manner as they may deem best."^ 

It is apparent that our legislature is free from most of the 
restrictions and limitations imposed by the constitutions in a 
number of states, and that many of the perplexing questions in 
regard to constitutionality which have arisen elsewhere are not 
likely to occur in Rhode Island. 

Growth of Taxation of Inheritances in Recent Years 

After the passage of the collateral inheritance-tax law of 
Pennsylvania in 1826 and of the law taxing the inheritances of 
non-resident aliens by Louisiana in 1828, no further legislation 
on the taxation of inheritances was adopted for sixteen years. 
In the next four years Alabama, Maryland, North Carolina, and 
Virginia imposed collateral inheritance taxes. From 1848 fo 
1885 Delaware was the only state to^ adopt legislation of this 
character. 

The year 1885 may properly be considered as the date from 
which the real development of inheritance taxation began in the 

^ Minot vs. Winthrop, 162 Mass. 2 Art. I, sect. 2. ^ Art. IV, sect. 15. 



THE INHERITANCE TAX 68/ 

United States. Three states — Connecticut, New York, and West 
Virginia — adopted inheritance-tax laws from 1885 to 1890. 
During the period 1890-1900 inheritance taxation assumed a 
prominent place in legislation, and sixteen states either adopted 
inheritance taxation for the first time or expanded their old 
laws. The next ten years showed even a more rapid exten- 
sion of this principle of taxation ; twenty-three states passed 
laws on the subject, and from 1910 to 191 5 six more applied 
the system. 

Twelve states have either incorporated inheritance taxes into 
their fiscal systems or enacted new laws within the last three 
years, and many states have made important additions and 
amendments to their laws during the same period. 

There are now but six states which do not tax inheritances in 
some form : Alabama, Florida, Mississippi, New Mexico, Rhode 
Island, and South Carolina. 

A Tax upon the Transfer of Property 

There has been much discussion as to whether the tax was 
upon the property itself or upon the transfer of the property. 
The decided weight of opinion, both legal and economic, is to 
the effect that it is a tax upon the transfer. 

Differences between the States in Classification of 
Heirs, Exemptions, and Rates 

There are wide differences between the twelve states which do 
not tax the inheritances of direct heirs, as to what transfers are 
taxed, and as to the rates imposed and exemptions allowed. In 
some state grandparents, brothers and sisters, and uncles and 
aunts are included in the exempt class ; in others the exemption is 
confined to father, mother, husband, wife, adopted child, and 
direct lineal descendants of the testator. 

Four states allow no exemptions and have a flat rate of 5 per 
cent, and their classifications of exempt heirs are not very 
dissimilar. Delaware has four classes, four rates, and a flat 
exemption of $500. Texas has three classes, three progres- 
sive rates, and exemptions of $2000, $1000, and $500 according 
to class. 



688 SELECTED READINGS IN PUBLIC FINANCE 

In the states imposing a tax on direct inheritances the practices 
are very dissimilar, classes, rates, and exemptions varying be- 
tween wide limits. 

California and Minnesota afford perhaps the best examples of 
highly differentiated classifications as to relationship, exemp- 
tions, rates, and the points at which the highest rates apply. 

In California in tlie class of direct heirs are included lineal 
ancestors of decedent, husband or wife, lineal issue, adopted or 
acknowledged child, lineal issue of either. In this class the 
exemption of widow or minor child is $24,000 and $10,000 to 
others. The rate on $25,000 or less is i per cent ; $25,000 to 
$50,000, 2 per cent. The maximum rate of 15 per cent is reached 
at $1,000,000, and all sums in excess of this amount are taxed 
at this rate. Collateral heirs are divided into two classes, with 
exemptions of $2000 and $1000 according to nearness of relation- 
ship. Strangers in blood are allowed an exemption of $500. 
The initial rates for these three classes are 3, 4, and 5 per cent, 
respectively. The maximum rate in the case of collateral heirs 
applies to amounts over $1,000,000, and these rates are 25 and 30 
per cent, respectively. The maximum rate applying to strangers in 
blood is 30 per cent, but it applies to amounts over $5,000,000. 

In Minnesota the highest rate applies to inheritances of over 
$100,000 and in the case of a wife or lineal issue it is 3 per cent; 
husband, adopted or acknowledged child, or the issue of the same, 
45^ per cent. The same rate applies to lineal ancestors, but the 
exemption in that case is but $3000 instead of $10,000 as in the 
first two classes. In the case of brother, sister, nephew, niece, 
son-in-law, or daughter-in-law the exemption is reduced to $1000 
and the maximum rate is 9 per cent. In the next class, which 
comprises uncles, aunts, or descendants of same, the exemption is 
reduced to $250 and the maximum rate is 12 per cent; for 
strangers in blood the maximum rate is 15 per cent. 

Tennessee affords an example of the simpler classification. 
There are but two classes : father, mother, husband, wife, child, 
and lineal descendants of decedent comprise the first class. 
Estates of decedents less than $10,000 are not taxed ; estates 
of $20,000 or less are taxed at i per cent, and estates of over 
$20,000 at i^ per cent. The second class comprises all not 
named above ; there is no tax on estates of less than $250, and 
for estates greater in value the tax is 5 per cent. 



THE INHERITANCE TAX 689 

The lowest initial rate applied in any state to direct heirs 
is I per cent and the highest 2 per cent. The lowest ultimate 
rate is i per cent and the highest 15 per cent for the first class. 
As these classes vary to a great extent, and as there is a great 
difference in the amount of exemption allowed, the rates alone 
do not offer a very satisfactory basis for comparison. 

Methods of Classifying Heirs 

There are very wide differences between the several states 
in methods of classification. In those states which are said 
to tax collaterals only, we find considerable differences as to 
what constitutes direct heirship. Some states include lineal an- 
cestors, sons-in-law, and daughters-in-law in the exempt class, 
while others do not. In the Kentucky law father, mother, hus- 
band, wife, lawful issue, son-in-law, daughter-in-law, adopted 
child, and lineal descendant of decedent are exempt, and all 
others are taxed at the same rate and the same exemption is 
allowed. 

In Delaware the exempt class includes father, mother, grand- 
father, grandmother, wife, husband, child, adopted child, and 
lineal descendants, but collaterals are divided into three classes 
and different rates applied, and "all others" are taxed at still 
a different rate and allowed less exemption than the other 
classes. 

States taxing direct inheritances show a similar difference in 
classification. Arkansas taxes the inheritance of father, mother, 
husband, wife, child, brother, sister, son-in-law, daughter-in- 
law, adopted or acknowledged child at the lowest rates, dis- 
tinguishing between members of this class as to exemptions, and 
places all others in the second class. Tennessee limits the first 
class to father, mother, husband, wife, child, and lineal descend- 
ants, placing all others in the second class. 

Massachusetts affords an example of a wide extension of the 
membership in the first class : husband, wiie, lineal ancestor, 
lineal descendant, adopted child, lineal descendant of same, 
adoptive parent, lineal ancestor of same, son-in-law, or daughter- 
in-law. The second class is composed of brothers, sisters, of 
full or half blood, nephews and nieces, all others being in the third 
class. In some states uncles and aunts are in one class and 



690 SELECTED READINGS IN PUBLIC FINANCE 

great uncles and great aunts in another. No general rule as 
to classification is found and no two states seem to be exactly 
alike in methods of classification. Some form of classifica- 
tion is found in all states imposing inheritance taxes but one, 
and the principle is amply sustained both from the legal and 
economic standpoint. 

Progressive Rates 

The question of the constitutionality of the progressive inherit- 
ance tax was settled definitely in cases brought under the Illi- 
nois statute of 1895. This4aw providing for progressive rates to 
distant relations and strangers was upheld both by the state 
courts and the Supreme Court of the United States.^ The 
positive determination of this question was followed by a rapid 
application of the progressive principle in a number of states, 
and progressive rates are now applied to one or more classes in 
the following states : Arizona, Arkansas, California, Colorado, 
Connecticut, Idaho, Illinois, Indiana, Kansas, Maine, Massachu- 
setts, Minnesota, Nebraska, Nevada, New Jersey, New York, 
North Carolina, North Dakota, Oklahoma, Oregon, South Da- 
kota, Tennessee, Texas, Utah, Washington, West Virginia, and 
Wisconsin. 

The states imposing inheritance taxes which do not employ 
progressive rates are : Delaware, Georgia, Iowa, Kentucky, 
Louisiana, Maryland, Michigan, Missouri, Montana, New Hamp- 
shire, Ohio, Pennsylvania, Vermont, Virginia, and Wyoming. 

The principles of progressive rates, the classification of re- 
lationship, and the graduation of exemptions according to rela- 
tionship have found such general application in the practices 
of the several states that they do not seem to require further 
justification. 

To make a distinction between collateral kindred or strangers in blood 
and kindred in the direct line in reference to the assessment of such a tax, 
either by exempting the kindred in the direct line or by imposing on col- 
laterals and strangers a higher rate of taxation, has the sanction of nearly 
all states which have levied taxes of this kind.^ 

1 Kochesperger vs. Drake, 167 111. 122; Magoon vs. Trust ^ Savings Bank^ 
170 U. S. 283. 

2 Minot vs. Winthrop, 162 Mass. 



THE INHERITANCE TAX 691 

The General Tendency 

Notwithstanding this great variation in details above referred 
to, a decided general trend is apparent. All states taxing direct 
inheritances allow some exemptions. These exemptions vary in 
amounts for members of the first class from $3000 to $24,000, 
and there are but four states — Missouri, New Hampshire, Ver- 
mont, and Virginia — which do not allow some exemption, and 
these states do not tax direct inheritances. There seems to be 
a considerable agreement, so far as can be determined by the 
different practices, that direct and collateral heirs and strangers 
in blood should have different amounts of exemption allowed, 
diminishing as the degree of relationship becomes more remote, 
and thirty of the forty-two states taxing inheritances apply to 
a greater or less degree this principle. 

Classification according to relationship is found in every state 
taxing inheritances, except Utah, which has one class, an exemp- 
tion of $10,000 applying to the whole estate, and progressive 
rates. 

The great majority of states employ progressive rates varying 
both in accordance with the amount of the inheritance and the 
remoteness of relationship. There is no uniformity of practice 
either as regards the rate of progression or as to the point at 
which the maximum rate is applied, or as to what point in re- 
lationship the rate, or exemption, or both, are changed. The 
general acceptance, however, of the principles that small in- 
heritances to direct heirs should be exempt, that the rates should 
be progressive both as regards the amount of the inheritance and 
according to the degree of relationship, that exemptions should 
be graduated according to relationship, and that the maximum 
rate should apply to the excess over a certain fixed amount, is 
worthy of attention. 

The Question of Situs for Purposes of Taxation and 
THE Danger of Double Taxation 

There is little interstate comity in the taxation of inheritances, 
and a. resultant double taxation in many cases. The proper situs 
of taxation for real estate is recognized as the location of the 
property. The real difficulty appears in the taxation of transfers 
of intangible property. Serious efforts have been made by some 



692 SELECTED READINGS IN PUBLIC FINANCE 

states to avoid double taxation by the introduction into their 
laws of so-called "reciprocal clauses," which provide for a relief 
from taxation of property taxed in another state in a similar 
manner; but if the rates are dissimilar and the foreign rate is 
less, they impose a tax at a rate which represents the difference 
between the two rates. Some states impose the tax upon cor- 
porate securities owned by a non-resident decedent kept within 
the state, whether the corporation is chartered within the state 
or not. In some instances transfers of the securities of domestic 
corporations are taxed regardless of the physical location of 
the securities or the domicile of the decedent. These states are 
actuated by a desire for revenue rather than by any consideration 
of sound economic theory. Under existing conditions double or 
even multiple taxation may readily occur. 

In the formulation of an inheritance-tax law certainly one of 
the most difficult questions involved is the determination of the 
situs at which the various classes of property should be taxed. 
In the case of real estate the question is definitely settled ; it is 
taxed universally in the jurisdiction where it is located; but 
beyond this nothing is positively determined. 

The practice in regard to real estate, so far as it applies to in- 
heritance taxation, seems to meet the requirements of justice and 
sound economic principle, and there is no reason and apparently 
no desire to change or modify it. But even here when there is 
conversion of the real estate in one state for the purpose of pay- 
ing a legacy or legacies, it has been held that the proceeds of the 
conversion were intangible and liable to taxation at the domicile 
of the testator in another state. 

The real difficulty arises in the transfer of personal property, 
and in this regard there is a bewildering diversity of practice 
and opinion which results in double or multiple taxation in an 
unjustifiable form, and annoyance and unnecessary expense in 
administration. 

In any consideration of double or multiple taxation it is neces- 
sary to determine the different kinds, and to separate those 
which are bad and avoidable from others which are justifiable 
or unavoidable. 

In its ordinary use the term "double taxation" is applied in 
such a manner as to convey the idea of injustice and oppression, 
and so well founded in the popular mind has this meaning be- 



THE INHERITANCE TAX 693 

come that any system of taxation to which it may be applied is at 
once condemned without considering the nature or effect of the 
double taxation. 

An illustration of double taxation which is perfectly just and 
proper from both the economic and moral standpoint is afforded 
by the usual local tax assessed in this state. The local tax and 
the state tax are separate and distinct taxes at different rates on 
the same property at the same time. This is a perfect example 
of a proper double tax. This tax might be a multiple tax and 
still be perfectly justifiable, and the only objection which could 
be properly made would be on the grounds of expense or incon- 
venience, or some other reason which has nothing to do with the 
tax itself. The test in this case is the amount of the tax, not 
how many times the tax is assessed. If the citizens of a state 
prefer to raise the necessary amount of revenue by several levies 
on the same property instead of one, it may be expensive and 
inconvenient, but it is not unjust from the economic or moral 
standpoint. 

A similar condition is brought about by a federal and a state 
income tax. There is no valid objection on the ground of double 
taxation in this case. Real estate taxed in one state and the 
income from it taxed in another — the domicile of the owner — 
is also perfectly justifiable legally and economically. Double 
taxation of these kinds is not objectionable and is probably 
unavoidable. 

These statements relative to the taxation of personalty hold 
good regarding the ordinary forms of state and local taxation 
of property generally. They do not apply, however, to inheritance 
taxes. If an inheritance tax is held to be a tax on a civil right or 
privilege it should be levied but once. Taxes on the same in- 
heritance by more than one jurisdiction do not appear to be 
justifiable economically. 

An example of objectionable and avoidable double taxation is 
afforded by the taxation of wealth in one state and the evidences 
of wealth in another. A corporation may be taxed upon its 
entire property and the holders of its securities also taxed at their 
full value by the same jurisdiction at the same time and rate, 
or these securities may be scattered throughout many states and 
taxed according to the domicile of the owners at approximately 
the same rate. 



694 SELECTED READINGS IN PUBLIC FINANCE 

As there are no constitutional limitations upon the levying of 
an inheritance tax upon personal property both by the state in 
which the property may be considered to be located and the state 
of domicile of the former owner, double taxation may and does 
occur to a great and even distressing extent. There are of course 
other considerations than domicile of the former owner, and situs 
independent of such domicile, which may determine jurisdiction, 
but these two conditions are the only ones used in the United 
States. Some states impose inheritance taxes according to the 
situs of the physical property, others according to domicile, and 
still others according to the location of the securities. The legal 
and constitutional right to impose each of these taxes is clear and 
well established, and the economic injustice is equally clear. 

An example of the foregoing is furnished by a corporation 
incorporated and owning property in one state, a part or even the 
whole of the stock and bonds owned by residents of another, 
and the securities kept in still a third state. This combination of 
circumstances, by no means rare in practice, furnishes an oppor- 
tunity for multiple taxation. 

No doubt it would be of great advantage to the country and to the 
individual states if principles of taxation could be agreed upon which did 
not conflict with others, and a common scheme could be adopted by 
which taxation of substantially the same property in two jurisdictions 
could be avoided, but the constitution of the United States did not go so 
far, and a state was not bound to make its tax laws harmonious in prin- 
ciple with those of other states.^ 

States which have large amounts of corporate property within 
their jurisdiction, with the stocks and bonds of the corporation 
owning the property held wholly or in large part by non-residents, 
lean perhaps naturally to the theory that the situs of the prop- 
erty should determine the imposition of the inheritance tax. 
This theory is carried out in the laws of a number of states, 
and those maintaining it argue in substance, in sustaining their 
position, that while the tax is legally a tax upon the transfer of 
property and not upon the property, the tax is nevertheless 
measured by the value of the property and is usually made a 
lien upon it, and the burden falls ultimately iipon and is borne 
by the property. They argue further that taxation is for the 

^ Kidd\s. Alabafna, i88 U. S. 730. 



THE INHERITANCE TAX 695 

maintenance of government, and as the chief purpose of govern- 
ment is the protection of property and the administration and 
enforcement of the laws of property, therefore the tax which is 
borne by property within a given jurisdiction should accrue to the 
use of that jurisdiction, whether levied upon the transfer, devise, 
succession, interest therein, or property itself. 

The difficulty of drafting and administering an inheritance-tax 
law based on this principle is generally admitted to be great, and 
by some it is considered practically insurmountable. Mr. Lawson 
Purdy, President of the Department of Taxes and Assessments 
for the City of New York, in a discussion of the subject said that 
to administer a transfer tax drafted thoroughly in accordance 
with this theory would be a task of ''frightful intricacy."^ Wher- 
ever the attempt has been made to administer such a law the 
difficulties encountered have been very considerable, to say the 
least. 

The Correct Principle 

The weight of authority, both legal and economic, in the 
United States does not seem to sustain this line of argument : 

If the inheritance tax is considered to be a tax on privilege it seems 
clear that the sovereignty which confers the privilege should impose the 
tax. The great weight of authority in the United States supports the 
conclusion that if the law of the owner's domicile says that a certain heir 
shall receive personal property, the law of the place where that personal 
property happens to be recognizes the transfer on principles of comity.^ 

The relative merits of imposing inheritance taxes according to 
the situs of the personalty and the domicile of the former owner 
are ably treated in the report of the Committee on Double Taxa- 
tion and Situs for the Purposes of Taxation made to the Ninth 
National Tax Conference. The Committee says : 

We believe that the correct principle underlying taxation of inheritances 
is that the state which determines the devolution of property should levy 
the inheritance tax thereon. If this principle is adopted, most questions 
of situs with relation to inheritance taxation will have been settled. Real 
estate devolves in accordance with the laws of the state in which it is 
situated. Personal property devolves in accordance with the laws of the 
state of domicile of the former owner. Applying the principle stated, it 

^ Proceedings of the Sixth N'ational Tax Conference, p. 311. ^ Ibid. p. 309. 



696 SELECTED READINGS IN PUBLIC FINANCE 

follows that real estate should be taxed by the state in which it is sit- 
uated ; personal property by the state in which its former owner was 
domiciled. 

A brief summary of the arguments sustaining their conclusions 
relative to personal property follows : 

Against taxation of personal property according to situs : 
Personal property may be said to have a situs for taxation in 
several states other than that of domicile. Extent of power to im- 
pose inheritance taxes on personal property on ground of situs not 
determined, a serious objection. Does not avoid double taxation. 
Difficulty of drafting law based on taxation according to situs. 
Administrative difficulties and cost of collection. Large number 
of states may be involved in settlement of one comparatively 
small estate. Involves dealing with fractional parts of estates 
rather than the whole. Increases number and decreases size of 
estates taxed. Difficulty in apportioning indebtedness and exemp- 
tions. Annoyance, delay, and expense to taxpayers. Requires 
ancillary administration in each state where personal property is 
located. Burden to taxpayer greater than resultant advantage to 
taxing state. Especially inapplicable when progressive rates are 
employed. Inequalities arise between tax on residents and non- 
residents, favoring latter. Bad effect on investments. 

For taxation of personal property according to domicile: 
Avoids double taxation. Question of domicile seldom arises. 
Adjustment of taxes not very difficult. In accordance with funda- 
mental legal theory. Reduces necessity for ancillary administra- 
tion to a minimum. Simplifies administration, avoids delay and 
expense to taxpayers and state alike. Power to transmit or re- 
ceive granted or may be regulated by state of domicile, therefore 
state of domicile should regulate tax. Deals with estates as a 
whole, but one set of rates and exemptions to be adjusted and 
but one appraisal to be made. Has less effect on investments. 

77. A National Inheritance Tax, by E. R. A. Seligman.^ — The 

case for a national inheritance tax is presented in the following 
selection : 

The preparedness campaign and the consequent need of in- 
creasing the revenue of the national government have brought 

1 Reprinted from the New Republic, March 25, 1916. 



THE INHERITANCE TAX 697 

forward a fiscal problem more important than any which has 
hitherto confronted the nation. We have gone through three 
stages in our fiscal history. Apart from the short-lived experi- 
ment made almost at the outset by the Federalists, the national 
government depended for its support for over 'half a century, 
and with only a slight interlude during the war with Great Brit- 
ain, well-nigh exclusively upon one form of indirect taxation — 
the customs revenue. The Civil War taught the country the 
inadequacy of this primitive system and added as a permanent 
feature the other side of indirect taxation known as the internal 
revenue. After almost half a century's experimenting with this 
second phase, the country reverted in 1909 to Hamilton's original 
idea and decided to draw a part of its fiscal support from direct 
as well as indirect taxation. Beginning with the corporation or 
excise tax, it soon added an income tax and is now seriously 
considering the imposition of an inheritance tax. 

This transition from indirect to direct taxation is an interesting 
phenomenon. Regarded as a democratic movement, it represents 
a world-wide tendency to bring existing systems of taxation into 
harmony with the principle of ability to pay and the endeavor to 
lighten the load which rests upon the less wealthy classes. In 
the United States the particular form which the movement is 
assuming is in no small degree influenced by the consideration 
that, although the direct taxes levied by the states and localities 
do not bear with special hardship upon the poor, it is precisely 
the larger fortunes that are escaping their fair share of the 
public burdens. It is natural, therefore, to witness, in this third 
stage of our fiscal history, a movement which attempts at the 
same time to diminish the burden on the poor by a reduction of 
the indirect taxes and to augment the burden on the rich by 
federal direct taxes. 

That this movement may be pushed too far is probable. More 
direct taxes are indeed needed ; but an exclusive, or even a pre- 
ponderant, reliance on direct taxes is both hazardous and un- 
necessary. It is hazardous because the history of every nation 
has taught that the narrower the base of taxation the greater are 
the difficulties. The fiscal objections to a single tax apply to a 
single system of any kind. Exclusive reliance for local, state, 
and federal revenues on any combination of direct taxes alone 
would necessitate such high rates as greatly to multiply the in- 



698 SELECTED READINGS IN PUBLIC FINANCE 

herent difficulties in any system. It is a significant fact that even 
the most democratic countries Hke England, Australia, and 
Switzerland continue to rely in large part upon indirect taxation, 
and that in Canada, as well as in Great Britain, the recently added 
war burdens have been divided between indirect and direct taxes. 
Those who enthusiastically contemplate a total abandonment by 
the national government of its indirect taxes are living in a fool's 
paradise. 

Furthermore, such an abandonment is as unnecessary as it is 
hazardous. Many think of indirect taxation as being virtually 
taxation on the consumption of the poor. That this has been in 
large measure true in the past is undoubted ; but that it is neces- 
sarily true is incorrect. For, in the first place, it is possible to 
apply to indirect taxation the graduated or progressive principle 
which is now becoming so popular in the case of direct taxation. 
Why should not taxation on consumption be so graded as to fall 
with heavier impact on the consumption of the wealthier classes ? 
Why should not the whisky tax be imposed at a higher rate on 
the better grades ? Why should not the tobacco tax be so ar- 
ranged as to increase progressively with the price of the cigar ? 
If we apply graduated taxation to incomes, inheritances, and 
property, why should we not utilize the same principle as far as 
practicable in the case of articles of consumption ? And, in 
the second place, indirect taxes are by vs) means limited to con- 
sumable commodities. In the shape of certain stamp taxes they 
can be applied to transactions so as to combine with great revenue 
a relatively slight burden on business and a still slighter burden 
on the small business man. If the necessities of the national 
revenue should one day become really urgent, it will be found 
that we shall not only be unable to dispense with indirect taxes 
but that it will be possible to frame a system of indirect taxation 
which will be in large measure free from the objections that are 
usually advanced. 

For the immediate future, however, it may be conceded that a 
relatively larger proportion of national revenues should be de- 
rived from direct taxation; and the question before the country 
now is as to what form it should take. This has brought into 
the forefront of discussion a matter which has hitherto engaged 
the attention of only a few students of public finance : the rela- 
tions of national, state, and local fiscal systems. As long as the 



THE INHERITANCE TAX 699 

revenue needs were few and simple, it was possible to live, as it 
were, in water-tight compartments, with a strict division between 
the national and state systems. But as soon as revenue needs 
became important, we were bound to witness the emergence of 
the same difficulties that have confronted the older federal states. 
As soon as the national corporation excise tax was introduced, 
careful thinkers began to ask, What should be its relation to the 
state tax on corporations ? As soon as the national income tax 
was enforced, it affected the problem of the possible reform of 
our state and local systems through a state income tax. And now, 
when we hear mutterings of a national inheritance tax, we are 
met by the insistent demand of the states that they should be 
left in complete possession of a field which some of them have 
already begun to cultivate. 

The complex problem of the relations of national and state 
taxation of corporations and of individual incomes cannot be dis- 
posed of in a few words. It is a subject that will require careful 
thinking and statesmanlike action in the not distant future. But 
even with the restoration of the sugar tax, and the doubling of 
the yield of the income tax, it is more than likely that additional 
revenues will have to be provided in the immediate future for the 
national government. The question at once arises. Why should 
not this additional revenue come from an inheritance tax? 

It is obvious that we have here an almost untapped source of 
income. In 191 3, the year of the latest census report, inheritance 
taxes were levied by thirty-five states with a total yield of a 
little over $26,000,000. In the same year Great Britain raised 
over $135,000,000 from its inheritance tax. Yet the national 
wealth of Great Britain at present is only between $70,000,000 
or $80,000,000 as compared with between $180,000,000,000 and 
$200,000,000,000 in the United States. It would be entirely safe 
to assert that if inheritances in the United States at the present 
time were to be taxed at the same rate and with the same effec- 
tiveness as in England before the war, we could easily raise 
$350,000,000 from this source alone. Compared with this, $26- 
000,000 that we are now receiving is a beggarly pittance. The 
yield with us is so insignificant not only because our rates are 
low but because the well-known complexities of interstate taxa- 
tion facilitate an evasion of the tax which would be altogether 
impossible under a national law. 



700 SELECTED READINGS IN PUBLIC FINANCE 

The fact remains, however, that the states now need and will 
continue to need a revenue from the inheritance tax. How, then, 
can this three-pronged problem be solved ? How, in other words, 
can we dispose once and for all, first, of the need of increasing 
revenue on the part of the national government ; second, of the 
retention or increase of such revenue for the state governments ; 
and, third, of the present undertaxation of some inheritances, 
arid double taxation of others, due to our interstate complexities ? 

The solution, I venture to assert, is a simple one : the taxation 
at a progressive but comparatively low rate of all inheritances 
by national law and the distribution of a part of the proceeds 
back to the states. If the national government were to levy both 
a direct and a collateral inheritance tax at even one-half the 
rates found in England before the war, and if it were to return 
40 per cent to the states, not only would the national government 
have an additional hundred millions of revenue, but the states 
would receive two or three times as much as they are now able 
to secure from this source. In other words, a national inheritance 
tax, with an equitable division of the yield, would benefit state 
and nation alike and would go far to solve our most pressing 
fiscal problem. 

The question will at once arise, Is such a project constitu- 
tional ? When the present writer first advanced this scheme sev- 
eral years ago, some of our prominent lawyers shook their heads 
in grave doubt. The last few years, however, have seen a great 
change in sentiment, and it is now reasonably certain that the 
plan can be worked out either directly or indirectly. 

The Constitution gives the national government the power to 
levy taxes, but does not restrict the government in its power to 
dispose of the proceeds. In 1836 the national government dis- 
tributed to the separate states twenty-seven millions of its sur- 
plus. Time and time again the national government has turned 
over to the states its property consisting of lands, and has appor- 
tioned to the states all manner of aid or contributions from the 
national treasury. There are not a few ways in which the pro- 
jected scheme could be realized. The national government 
might, for instance, utilize the machinery of administration of 
the inheritance tax as practised by the several states, and might 
distribute to them a certain share of the proceeds as compensa- 
tion therefor. Or the government might retain the entire pro- 



THE INHERITANCE TAX 70 1 

ceeds of the inheritance tax and then by a separate measure pro- 
vide for a periodical deposit among the states of certain sums. 
The execution of the plan presents no insuperable difficulties ; 
the important thing is a realization of its need and its justice. 

As I have pointed out in another place, the old doctrine of 
separation of sources, as between federal and state revenues, 
needs to be supplemented by the nev^er doctrine of division of 
yield. Until our statesmen realize that the fiscal problem of the 
United States must be envisaged as a v^hole, and that neither 
state jealousy nor national usurpation can be allow^ed to domi- 
nate — not until then can the problem be solved. Whether the 
inheritance-tax bill is introduced as a separate measure, or 
whether inheritances are to be included as income within the 
new income-tax bill, it is important to realize that we are stand- 
ing on the threshold of an entirely new system. Upon the wisdom 
with which the inheritance-tax issue is treated in the present 
Congress will depend in large measure the precise character of 
the impending reforms in the American state as well as national 
finance. It is time that the discussion be put upon the high 
plane which it deserves. 



CHAPTER XIX 

THE INCREMENT TAX : LOCAL TAXATION IN 
FRANKFORT 

78. The New British Land Taxes. — Professor Carl C. Plehn, 
in a recent report to the State Tax Commission of California, 
presents the following account of the new taxes introduced in 
Great Britain in 1910:^ 

The New English Land Taxes 
Introduction 

The new English land taxes (duties) are interesting from 
many different points of view. Historically they recall to mind 
the old land tax of 1692, and especially the bargain, good or bad, 
which was made with the landowners by Parliament in 1798, 
by which the tax might be redeemed, and under which a large 
part has been redeemed. The new taxes are, to be sure, very 
different in theory, as also in force and effect, from the old land 
tax. But one of them, at least, that is, the ''Undeveloped Land 
Duty," can, without stretching the point, be regarded as a re- 
pudiation of the ancient contract of immunity. In the political 
field their enactment caused a well-nigh revolutionary struggle 
over the rights and powers of the House of Lords, and in so far 
as these taxes may eventually diminish the value of private 
ownership or rights in land, and hence the dignities attaching 
thereto, they may eventually alter the constituent character of 
that house. But this, of course, is problematical. 

Economically they distinctly recognize the argument that land 
values, excluding capital invested in the land, and especially that 
the increments in land values, are the result of social progress, 
and hence, if that is not a non sequitur, are appropriable by gov- 

1 The New English Land Taxes. State Tax Commission, Sacramento, 
California. 

702 



THE INCREMENT TAX 703 

ernment to promote that progress. As yet they go but a little 
way toward the appropriation of the entire increment, but, of 
course, they may be increased. In a more emphatic way they 
assert that there is a public duty attaching to the ownership of 
land, the duty to develop and use it, and hence to enhance the 
wealth of the nation. One of them looks distinctly like a penalty 
for nonuse of land. It may, however, be regarded as a tax on 
unrealized income. 

Sociologically they are held to contain the possibility of 
changes in the constituent classes in England. This, again, is 
problematical. 

Financially they involve several interesting and novel experi- 
ments. Their administration requires the establishment of very 
costly machinery. Especially has this machinery been costly in 
the installation. Although the revenues are very small, as yet, 
and may continue so, especially in view of war conditions, par- 
ticularly when compared with the "great engine of finance," 
the income tax, yet this subsidiary engine has the promise of 
developing considerable power. The Napoleonic wars and their 
resulting fiscal burdens fastened on England the income tax, 
which had been introduced as a temporary expedient. It is pos- 
sible that the World War will rivet the new land taxes to the 
British tax system, although it is possible that the costliness of 
their administration will militate against that. At all events, 
since the new machinery was so nearly perfected before the war, 
it may be exploited to meet the increased burdens. The posses- 
sion of power leads to its use. 

Obviously it will be years before we shall be able to judge of 
the political, social, and economic effects of these new taxes. 
In the immediate future many of the financial results will be 
obscured by the disturbances in expenditures and by the ex- 
traordinary calls on the revenues due to the war.^ But there are 
some features of the new taxes that can be profitably studied 
without waiting for further developments. One of these is the 
method of valuation laid down. This is full of instruction on the 
whole problem of values and of valuations. 

1 In support of this we may quote from the London Economist^ which said of 
Mr. McKenna's Budget Speech of September 21,1915: "It was a plain, unvarnished 
statement of unparalleled revenues, an inconceivable expenditure, and an 
unimaginable deficit, followed by a hst of fresh taxation which imposed, as he 
said, an unprecedented burden on the country." 



704 SELECTED READINGS IN PUBLIC FINANCE 

The List of New Taxes 

"The Finance (1909-10) Act, 1910" (this jumble of words and 
numbers being the legal title of the act provided for it by Par- 
liament), established four new taxes on land. They were by 
name and briefly characterized : 

1. The Increment Value Duty. 

2. The Reversion Value Duty. 

3. The Undeveloped Land Duty. 

4. The Mineral Rights Duty. 

The Increment Value Duty is a tax on the increase in the value 
of land after April 30, 1909. The Reversion Value Duty is a tax 
on the value of the "windfall" the owner receives when leased 
property upon which a tenant has made improvements, or which 
has otherwise enhanced in value during the term for which it was 
leased, reverts to the owner by termination of the lease. The 
Undeveloped Land Duty is an annual tax on the capital value of 
the kind of land described by the name of the duty. The Mineral 
Rights Duty is a tax on the annual rental value of mining rights. 

Exempt from these taxes are: all agricultural lands, except 
such as may be worth more for other purposes than they are for 
agriculture ; all small holdings ; and lands used for a public or 
quasi-public purpose. Exempt, also, from the undeveloped land 
duty is all land of that description which is worth less than £50 
($243) per acre. They are then taxes on urban and suburban 
lands and on mines. 

The New Doomsday Book 

The first and third, and to a lesser extent the second, of these 
taxes involved establishing the value and character of all the 
land of England, at a given date, as the point of beginning. The 
value to be established was the capital value. As the Enghsh 
people reckon value very often in rental or annual value and fre- 
quently without reference to the capital or principal value, this 
was a somewhat novel mode of approach. More so, at all events, 
than it would be in this country. They are the only English taxes, 
except the inheritance taxes, levied according to capital value. 

All land was to be included in the valuation, because the fact 
of its taxability or exemption had to be established and, more- 
over, because any given piece might at any time pass from the 



THE INCREMENT TAX 705 

exempt to the taxable class or classes. The date selected as the 
point of beginning was the 30th of April, 1909. This date was 
long before the final passage of the act. It was the day after the 
budget speech by Mr. Lloyd George, Chancellor of the Ex- 
chequer, in which the new taxes were proposed. Owing to the 
opposition of the House of Lords, necessitating an appeal to the 
country, and a new parliamentary election, the act was not* passed 
for a year,' less a day, after the date with reference to which 
the values were to be determined. This was a concession to the 
landowners, as it was assumed that the mere announcement of 
the proposed taxes depressed the value of land. Hence, to use the 
higher value, as of the day of the announcement, rather than 
the depressed value after the announcement, meant using a 
smaller value for the taxable increments. 

The new taxes, therefore, involved writing a new Doomsday 
Book, a record, or register, as it is variously called, or a cadastre 
of all lands in the United Kingdom, and their ownership, as they 
stood on the 30th of April, 1909. This was a gigantic undertak- 
ing, the more so as it had to be done practically de novo, there 
being nothing of the kind in existence save the basic maps. It 
was estimated that it would take four years and that it would 
cost, when completed, approximately £2,000,000, or nearly 
$10,000,000. In April, 1913, when, it is perhaps safe to assume, 
the work was at or near its height, it is reported that there were 
4153 officials employed and that their annual salaries were 
£492,620. It was reported at a recent date, January, 1916, that 
the survey had been completed as to 95 per cent of the land, but 
further work thereon had been suspended on account of the war. 
The enforcement of the taxes, however, necessarily involves a 
continuance of a large part of the staff. The cost of the Dooms- 
day Book may be regarded as a capital investment good for 
many years to come. It was the original plan to have the values 
revised once every five years, although this revision would have 
little to do with the enforcement of the taxes or the determination 
of their amount except as to the Undeveloped Land Duty. 

The Administration 

The making of the Doomsday Book and the whole admin- 
istration is in the hands of the Commissioners of the Inland 
Revenues. The country was originally divided into 128 districts, 



7o6 SELECTED READINGS IN PUBLIC FINANCE 

in each of which there is a head valuer, whose work is super- 
vised by traveHng inspectors. The administration was highly 
centralized, nothing being finally passed until approved by the 
commissioners. Hearings of interested parties were also pro- 
vided for. The assessment districts being large, the officer in 
charge was a man of responsibility. As one of the best-known 
facts cgncerning landed property in England is the rental value, 
that served largely in determining the capital value. 

Land. The Meaning of the Term 

Thus far we have used the term "land" loosely. It is neces- 
sary before going further to note the meaning of that term in 
English law\ By the so-called ''Interpretation Act" of 1889, 
Parliament decreed that unless the contrary intention appears, 
the expression ''land shall include messuages, tenements, and 
hereditaments, houses and buildings of any tenure."^ For this 
the nearest American equivalent in tax law is "real estate and 
any interest therein." Thus we must bear in mind then chat in 
English law "land" is not merely the God-given soil, or the sur- 
face of the earth, but minerals under and man-made improvements 
on and under the surface. This, however, is not what is taxa- 
ble under these taxes. It is only the "site value" which is tax- 
able. This is a somewhat intricate conception and difficult to 
arrive at. For the first we may say that "site value" is approxi- 
mately what the American would call the value of the "bare 
land," or what our tax laws mean by land values when they dis- 
tinguish between land and the improvements thereon, if we 
exclude improvements like grading, drainage, or embankments. 

1 " Messuage," it may not be amiss to explain, means a dwelling house, with 
its appurtenant buildings, yards, and gardens. " Tenements and hereditaments," 
possibly best read together, sum up all property, or property rights, in land, or 
related to land present and future, temporary or permanent. The Finance 
(1909-10) Act, 1910, excludes "incorporeal hereditaments issuing or granted 
out of the land." Dr. Napier, the great legal authority, explains that this means 
generally " advowsons, tithes, rights of common, way, water and light, offices, 
dignities, franchises, or rents," a miscellaneous list of privileges or burdens, which 
would theoretically increase or diminish the value of land or of the lands from 
which they spring, or on which they fall. As burdens on one piece they may 
enhance the value of other pieces to which they inure as a benefit. Thus, if the 
owner, or user, of one piece of land must leave light for a neighbor, the one loses 
and the other gains the value of the "incorporeal hereditament." 



THE INCREMENT TAX 707 

There is another term to which the English law gives a mean- 
ing different from that which it has in this country, and that is 
"owner." The act says that the term "owner" means the 
person "entitled in possession to the rents and profits of the 
land in virtue of any estate of freehold, except that where land 
is let on lease for a term of which more than fifty years are 
unexpired, the lessee under the lease, or. if there are two or more 
such lessees, the lessee under the last created under-lease, shall 
be deemed to be the owner instead of the person entitled to the 
rents and profits as aforesaid." Thus the tenant who has a 
long lease of which fifty years are unexpired is to be regarded 
as the owner. As much of the land in England is leased, this 
is important. The explanation of this provision seems to be 
that in the first place any increase in the value of the land 
would accrue to the tenant at least for the period that the lease 
still has to run, and, in the second place, the increase that 
might accrue to the owner will, in any event, be covered by 
the second of the new duties, the Reversion Value Duty. 

In the intricacies of English land tenure, simplified as that has 
been by legislation during the last century, there still remain 
some forms of landholding which are unknown and others 
which are uncommon in the United States, and, what is more 
important to a clear understanding of the English law, there are 
shades of meaning, wholly unfamiliar to us, which attach to 
those terms which are in common use in both countries. It is 
difficult for one not to the manner born to appreciate these dif- 
ferences. But there are some of them which it is necessary to 
try to distinguish. At the very beginriing .of the act we en- 
counter the term "fee simple of the land." Dr. Napier says 
that "fee simple" is "the fullest and most complete right of 
ownership known to English law." Joshua Williams, the learned 
author of "The Law of Property," tells us that "English law 
recognizes property in, but not absolute ownership of, land." 
In fact, if not in theory, "fee simple" is a right of ownership, 
not quite but yet very nearly as complete and free as the rights 
conveyed by a United States patent. The Crown has theoretical 
rights in land which is held in fee simple that exceed our recog- 
nized governmental rights of eminent domain. But the exercise 
of these rights is not common. Possibly a helpful way of ex- 
pressing the distinction, at least so far as transferability of title 



708 SELECTED READINGS IN PUBLIC FINANCE 

is concerned, is to say that the American conception of fee simple 
is less personal than the English. Thus we speak of "patented 
land" as if the patent were a concrete condition attaching to the 
land, although, of course, the owner's personal rights do arise 
from the patent. But the English use of the term "fee simple" 
suggests first of all the owner's personal rights and yet implies 
also a condition attaching to the land. For our present purpose 
this subtle distinction is of only minor importance, since the act 
contemplates that the tax will reach every "interest in the land." 
Thus leasehold interests of all sorts are separately treated. But 
a mortgage on land is not considered an interest therein. 

"Copyholds" and "customary freeholds" are two terms not 
known in the United States. They are forms of tenure little 
short of "fee simple." The act provides that these shall be re- 
solved into their constituent elements and treated either as 
(i) ownerships or as (2) leases, according as their terms run. 
Thus, under the "Copyhold Act of 1894," or under the common 
law, copyholds and customary freeholds may be "enfranchised" 
and the "lord's seigniorial rights or interest in the land" re- 
leased, by a bargain between the lord and the copyholder. The 
consideration which would have to be paid to obtain enfranchise- 
ment is treated as lessening the value of that interest in the land 
that is held under copyhold. 

Relation of These Taxes to Other Taxes 

These are new and additional taxes. They make, save in one 
minor point, no material change in prior existing taxes or gov- 
ernment charges on land or on the income or rent therefrom. 
Thus the old land tax, if it has not been redeemed, goes on as 
before. There is some three and one-half million dollars of this 
old tax still collected each year. So, too, the local "rates," which 
are in various ways too complex to set forth here, relating to 
land or to its rentals, continue unchanged. A plan to donate half 
the proceeds of the new taxes to local highways, which was em- 
bodied in the act, has been abandoned. So these new taxes work 
no relief in local taxation directly. There is no change on account 
of the new taxes, in the income-tax schedules A and B, which 
cover income received from land. Nor are the several inheritance 
taxes affected, save that in computing the principal value of an 



THE INCREMENT TAX 709 

estate subject to these taxes, there is to be a deduction made 
equal to the amount of the increment tax paid on the same 
occasion. As this deduction is from the value, and not from the 
tax, it will make a relatively insignificant reduction in the death 
duties. 

Theory of These Taxes 

The general theory of these taxes seems to be that the "site 
value" of land, in so far as it is not attributable to any expendi- 
ture, skill, or foresight on the part of the owners, and excluding 
such expenditure, is a result of social and economic progress, a 
consequence of the growth of population, and therefore is a sub- 
ject peculiarly fit for taxation. Under this theory, then, the incre- 
ment in the value of land from time to time is preeminently a fit 
subject for taxation. By the same test the attempt to make a 
speculative profit by holding land idle and out of use is equally a 
proper subject of special taxation. The theory assumes that the 
increase of land values "is a perpetual stream of communal 
wealth deposited from year to year on the property of the fortu- 
nate owners of land," as Dr. Napier expresses it. 

But these taxes are not the "single tax" of Henry George, nor 
do they approximate it. The resemblance is superficial and lies 
in the single fact that both taxes rest on the assumption that the 
increment of land values is the result of the growth of population. 
The object of the single tax is to take from the owner of land 
the enjoyment of the annual value of the ground rent. But the 
increment value tax leaves the owner in full enjoyment of the 
rentals until an "occasion" arises, and then takes only a part. 
The single tax makes the government at least a partner with 
the owner, if not the owner in chief, but the increment taxes 
make the government a quasi-heir to the owner's interest, or to 
a part thereof. Furthermore, these taxes might, conceivably, be 
defended on the same grounds that higher rates for the income 
tax have been applied to some kinds of income. Thus, if it is 
proper to tax income from investments, "lazy incomes," as 
Gladstone called them, more heavily than incomes which are 
gained from work, then it might be urged that the increment in 
the value of one's land is a very "lazy" income. 

Further light is thrown on the theory of these taxes by the 
meaning that is given to the "site value" that is to be the basis 



7IO SELECTED READINGS IN PUBLIC FINANCE 

of the tax. Site value has been variously described as "the 
prairie value" or as the "pure economic rent" of land. A given 
piece of land in its present state, ready to be built upon, may 
have been drained or graded ; roads may have been built to pro- 
vide access to it; the old land tax, or the old tithe, originally 
a church contribution, on it may have been redeemed; parks, 
squares, and boulevards may have been laid out at the owner's 
expense to enhance its attractiveness; and advertising may have 
lent it popularity or created a vogue for it. Whatever value any 
of these things or other things, if done at the owner's or his an- 
cestors' expense, may add to the value of the land is excluded 
from the taxable site value. It is not, however, prairie value 
alone, but that plus the value that has been added by the com- 
munity through growth of population and the development of its 
institutions, good schools, churches, public works and the ob- 
servance of law and order and the like. On the other hand, the 
land may be subject also to burdens, fixed charges, easements, 
restrictions, or cumbered by buildings, forests, or shrubs, unsuited 
to its proper use, all of which lessen its value. Dr. Napier points 
out that "it may, indeed, be that the assessable site value is a 
minus quantity, as where the nominal value of a rent charge 
issuing out of the land, either of itself or with the cost of roads, 
drainage, or embankment exceeds the value of the land free from 
that charge." What is subject to the tax is then pure economic 
rent or the value of the "original and indestructible powers of 
the soil," in the market as tfiat market is now constituted. 

Exemptions 

The theory of the tax would have required that it should be 
imposed on all land, but agricultural lands were exempted. It 
was stated by the proponents of the new taxes that they would 
eventually be extended to cover all land, but agricultural land in 
England at the time of the imposition of these taxes was not 
advancing but declining in value. It was claimed that agricul- 
tural land had decreased in value from 1878 to the time the act 
was proposed by between 20 and 25 per cent. These taxes are, 
therefore, primarily taxes on city lands, and fall especially on 
suburban lands, the value of which it is said has been increasing 
rapidly. 



THE INCREMENT TAX 71 1 

How the Site Value is to be Determined 

How the site value is arrived at and assessed is of peculiar 
interest. The act is very explicit on this point, and has been 
supplemented and interpreted by rulings of the Commissioners 
of the Inland Revenue, so it is possible to get at this very fully. 

While the values are to be finally fixed by the commissioners, 
the taxpayers must assist, and any one connected with the use 
of the land may be called upon to assist in the work. As we 
shall see, the assessment requires a great deal of information, and 
the administration was regarded by the landowners as extremely 
"inquisitorial." Most of the opposition centered around one of 
the schedules or reports that the landowner is required to file. 
This was known as "Form IV,'' which had to be filled out by 
every " owner of land and by any person receiving rent in respect 
of land." In a way it appealed to divergent interests, since it 
makes the landlord tell tales on his tenant and the tenant on 
his landlord. It is a cumbersome schedule, this "Form IV," 
a really appalling document. It calls for information on every- 
thing that can possibly throw light on the value. The owner 
may fix a value which then must be "considered" but is in no 
way binding or limiting on the commissioners. The latter must, 
however, submit a "provisional" valuation, to which the owner 
has the privilege of objecting. Finally, an appeal lies to a referee 
and from him to the courts.^ 

The definition of value is that it shall be the value which it 
would be expected that lan^ would realize "if sold .... in the 
open market by a willing seller in its then condition." This 
definition contains as many doubtful elements as do the Amer- 
ican property tax value definitions. But who can frame a 
better one? 

The Four Values 

There are in all four different values which the commissioners 
are to fix, three of which enter into the computation being used 
to ascertain the fourth. They are : (i) the "gross value" ; (2) the 
"full site value"; (3) the "total value"; and (4) the "assessable 
site value." The definitions given in the act arei 

^ The intervention of the courts has held up the revenues. But this is another 
matter, which cannot be taken up in this paper. 



712 SELECTED READINGS IN PUBLIC FINANCE 

The gross value of land means the amount which the fee simple of the 
land, if sold at the time in the open market by a willing seller in its then 
condition, free from incumbrances, and from any burden, charge, or re- 
striction (other than rates or taxes) might be expected to realize. 

The full site value of land means the amount which remains after 
deducting from the gross value of the land the difference (if any) be- 
tween that value and the value which the fee simple of the land, if sold 
at the time in the open market by a willing seller, might be expected to 
reahze if the land were divested of any buildings and of any other 
structures (including fixed or attached machinery) on, in, or under the 
surface, which are appurtenant to or used in connection with any such 
buildings, and of all growing timber, fruit trees, fruit bushes, and other 
things growing thereon. 

The total value of land means the gross value after deducting the 
amount by which the gross value would be diminished if the land were 
sold subject to any fixed charges and to any pubHc rights of way or any 
public rights of user, and to any rights of common and to any easements 
affecting the land, and to any covenant or agreement restricting the use 
of the land entered into or made before the thirtieth day of April, 1909, 
and to any covenant or agreement restricting the use of the land entered 
into or made on or after that date, if, in the opinion of the commissioners, 
the restraint imposed by the covenant or agreement so entered into or 
made on or after that date was when imposed desirable in the interests 
of the pubHc or in view of the character and surroundings of the neigh- 
borhood, and the opinion of the commissioners shall in this case be 
subject to an appeal to the referee, whose decision shall be final. 

The assessable site value of land means the total value after de- 
ducting *• 

(a) The same amount as is to be deducted for the purpose of arriv- 
ing at full site value from gross value ; and 

(6) Any part of the total value which is proved to the commissioners 
to be directly attributable to works executed, or expenditure of a capital 
nature (including any expenses of advertisement) incurred bona fide 
by or on behalf of or solely in the interests of any person interested in 
the land for the purpose of improving the Value of the land as build- 
ing land, or for the purpose of any business, trade, or industry other than 
agriculture ; and 

(c) Any part of the total value which is proved to the commissioners 
to be directly attributable to the appropriation of any land or to the 
gift of any land by any person interested in the land for the purpose 
of streets, roads, paths, squares, gardens, or other open spaces for the 
use of the public; and 



THE INCREMENT TAX 713 

(d) Any part of the total value which is proved to the commissioners 
to be directly attributable to the expenditure of money on the redemption 
of any land tax, or any fixed charge, or on the enfranchisement of copy- 
hold land or customary freeholds, or on effecting the release of any cove- 
nant or agreement restricting the use of land which may be taken into 
account in ascertaining the total value of the land, or to goodwill or 
any other matter which is personal to the owner, occupier, or other 
person interested for the time being in the land ; and 

(e) Any sums which, in the opinion of the commissioners, it would 
be necessary to expend in order to divest the land of buildings, timber, 
trees, or other things of which it is to be taken to be divested for 
the purpose of arriving at the full site value from the gross value of the 
land, and of which it would be necessary to divest the land for the purpose 
of realizing the full site value. 

Where any works executed or expenditure incurred for the purpose of 
improving the value of the land for agriculture have actually improved 
the value of the land as building land, or for the purpose of any business, 
trade, or industry other than agriculture, the works or expenditures shall, 
for the purposes of this provision, be treated as having been executed 
or incurred also for the latter purposes. 

At first reading the definitions and the method they prescribe 
seem roundabout and involved. It requires a little study to see 
what they mean and the reasons for the involved language. Thus 
it seems strange to be told that to find the "total value" you 
must take from the "gross value"' the difference between the 
"total value" and the "gross value." Surely if one knows the 
"total value" to begin with, why compute it? 

The fact is that the "total value" is substantially the market 
value of the land in the broad sense, including the improvements. 
It will be, in most instances, the first ascertainable quantity, — an 
ascertainable fact. It is the price that is paid when the "land" 
is sold. The "gross value" is a hypothetical quantity, set up 
merely to call attention to certain factors which, in most cases, 
diminish the "site value" but are not necessarily included in 
the "total value," in fact, are generally reasons why the "total 
value" is low. These factors are, according to Dr. Napier, "ease- 
ments, fixed charges, and restrictions arising out of contract and 
many other burdens."^ 

The "total value" or the market price would, generally speak- 

l Form IV enumerates six groups of such items. 



714 SELECTED READINGS IN PUBLIC FINANCE 

ing, be less than the gross value. It is, of course, conceivable 
that a given piece of land might enjoy rights from or over other 
lands of a greater aggregate value than the easements it granted 
to other lands. But as most of these easements and the like are 
to the public, the usual effect is that the gross exceeds the total 
value. Yet, although the gross value is hypothetical it is not 
necessarily hard to arrive at. Dr. Napier suggests that it is what 
the man in the street estimates to be the value of a given house 
looking at it from the street and knowing nothing of the ease- 
ments, fixed charges, and other burdens attaching to the title. 
The rules of the commissioners direct the valuers to arrive at 
the gross value by "an independent calculation and without 
necessarily being' bound by the actual consideration paid." To 
illustrate : An experienced valuer, viewing a factory building and 
site, decides that it is worth, say iio,ooo. He finds, however, 
that it actually sold for £8000. On inquiry he finds that it is 
subject to a right of way leading to a neighboring factory, and 
that another neighbor has a right to free space for air and light, 
and that the property must pay the upkeep of a little park in 
front of it. These easements account for the difference. By con- 
sidering these easements separately and in the light of the gross 
value he has more information than he would otherwise have as 
to the reasonableness of the ''total value." Furthermore, "gross 
value" is useful in equalizing between different pieces of prop- 
erty, the more especially as the relative values are disturbed by 
the easements. 

" Full site value " is also defined in the same roundabout way 
as "total value." It would have seemed simpler to have said 
that it is the "total value," less what a buyer would include in 
that value for the buildings, plus the value of the easements 
which make up the difference between "gross" and "total" value. 
The treatment of the value of the buildings and other structures 
is very interesting and suggestive. The most important thing is 
the emphasis laid on the idea that buildings and other structures 
are to be valued, not at cost, nor at reproduction cost, nor de- 
preciated cost, but simply and solely at what they add to the 
value of the entire complex of which they form a part. In the 
same way expenditures on the site to adapt it to use are valued 
iiot at what they cost but at what they add to the site without 
reference to cost. A sea wall may add greatly more than its cost 



THE INCREMENT TAX 715 

to the value of a salt marsh. Again, there are to be deducted 
"any sums ... it would be necessary to expend in order to 
divest the land of buildings, timber, etc." The reason for this 
curious provision is that the act had in contemplation lands on 
the suburbs of cities, from which the old farm buildings and 
other stuff would have to be removed before it could be used for 
building purposes. Again, we find that a deduction may be al- 
lowed for "expenses of advertising." That is, intangible as well 
as tangible values attaching to the land and resulting from the 
owner's own efforts or expenditures are to be deducted. Even 
"good will or any other matter personal to the owner" is to be 
deducted. 

The wide extent to which lands in England are leased, to which 
reference has already been made, makes it necessary to split up 
the interests in many cases. Rents for lands, annuities paid out 
of them, and the like have to be separated. This is done by com- 
puting the present values of the different incomes, whether for 
a fixed term of years, for life, and so on. It is interesting to note 
that in making these computations 4, per cent was used for com- 
puting the values of the fee simple and 6 per cent for computing 
leasehold interests. 

The Occasions 

The Increment Value Duty is levied and is payable on occasions. 
The occasions are (i) the transfer or sale of the fee simple of 
the land or of any interest in the land, or the grant of a lease for 
over fourteen years, unless the contract for the sale or the lease 
was made before the act took effect. I.e., April 29, 1910; (2) on 
the death of any person dying after the passage of the act 
where the fee simple of the la.nd or any interest therein is subject 
to the estate duty;^ (3) where the land is held by a body cor- 
porate or its equivalent, then the occasions on which the tax is 
levied are the 5th of April, 1914, and every subsequent fifteenth 
year thereafter. But the tax Is then payable, if the corporate 
body so elect, in fifteen annual installments. The granting of a 
short lease, that is, one for not more than fourteen years, is not 
an occasion. 

1 The estate duty is the chief inheritance tax. Unlike most American inherit- 
ance taxes, it is levied on the estate of the deceased, not on the distributive 
shares, which, in England, are subject to another tax. 



7l6 SELECTED READINGS IN PUBLIC FINANCE 
The Basis of the Tax 

On each occasion the "site value" is reascertained in substan- 
tially the same manner as it was for the new Doomsday Book. 
If there has been a sale, of course the price paid is the important 
matter. Each interest is separately assessed, but the tax applies 
only to the one that is the subject of the occasion. The unit is 
each piece in separate occupation or use. 

The tax is levied on the '' increment value," or the difference 
between the "site value" as assessed on the "occasion" and the 
"original site value" set down in the new Doomsday Book, if 
the former exceed the latter. No duty is payable unless the 
increment is more than lo per cent of the original site value and 
the duty is collected only on that part of the increment which 
exceeds this lo per cent. The duty on the lo per cent is "con- 
sidered paid," which is a curious-sounding provision, but one 
that has its effect on the computation of the tax on subsequent 
" occasions." If on occasions after the first the increment is not 
more than lo per cent of the site value on the last occasion pre- 
ceding, no duty is due, and so on. But these deductions may not 
be accumulated so as to exceed 25 per cent of the original value 
in any period of five years. These 10 per cent deductions are ex- 
plained as covering any expense the owner may have been put to 
by the act and as a margin for possible mistakes in the valuations. 
No duty is payable unless the site value on an occasion exceeds the 
original site value. Thus, if a piece of land shrinks in value and 
then later recovers but does not exceed the original value, no duty 
is payable on the increment from the low value to which it fell. 

It will be observed that it is in the interest of the owner to 
have a high value placed upon the property in the first instance. 
Consequently those owners who had reason to claim that their 
lands were depreciated on the 30th of April, 1909, had a griev- 
ance. They were given relief in 191 1, when the act was amended 
permitting them to substitute any value, which they could prove, 
by evidence, such as a sale, had been the value during a period 
of twenty years prior to April 30, 1909. 

The Rate 

The rate of the Increment Value Duty is one pound in every 
full five pounds of taxable value. That is, one-fifth, or 20 per 



THE INCREMENT TAX 717 

cent, of the increment in value is to be taken by the government, 
whenever the owner harvests the increment. 



Collection 

The duty is collected as a stamp tax on the instrument of 
transfer. Thus, if it is not paid the transfer is invalid and the 
instrument worthless, so that the vendee will see to it that the 
stamps are attached. 

Illustrative Examples 

Let us assume that there is a lot of land known as Whiteacre, 
which is a factory site and on which there is a suitable factory 
building. On April 30, 1909, it was found to be worth: "Gross 
value," £10,000; "total value," £9000; "full site value," £2000. 
Then, by the rule laid down in the definitions, the "original 
assessable site value" is £9000— {£10,000 — £2000) —the sum of 
the various deductions. If it appeared that there had been ex- 
pended on a retaining wall £100, for street work £300, to redeem 
the old land tax of £5 per annum, £100, then the total of the 
deductions is £500. Then 9000 less 8000 less 500 gives 500, and 
the assessable "site value" is £500. 

Let us now assume that A is the ow^ner. of the fee simple and 
that there is no lease or other interest in the land. On January i, 
1912, A sells the fee to B for a price which, by the same method 
as was followed above, but with, of course, new values for the 
different items, gives a new "site value" of £1000. This, then, 
is the first "occasion" on which the tax is to be paid. The tax 
is one-fifth of the difference between £1000 and £500, or £100, 
but the amount to be paid is only £90 because the tax on one 
tenth of the original site value is "considered as paid." 

A year later B leases the property to C for ninety-nine years. 
For the purposes of this tax the lease is considered in the same 
light as a sale. On this the second "occasion" for the imposition 
of the tax the "site value" is found from computing the value on 
the basis of the rent to be £1250. The increment accruing to B is 
$250. He would apparently be entitled to a deduction (or to 
"consider as paid") for the tax on 10 per cent of £1000, or £20 
in tax. But it will be observed that this £100 plus the £50 al- 
lowed to A on the first "occasion" makes £150, which exceeds 



71 8 SELECTED READINGS IN PUBLIC FINANCE 

25 per cent of the original site value of £500 and is, therefore, 
more than is allowed in any one five-year period. Hence the 
calculation is changed about; £500 plus 25 per cent of itself is 
£625. The total increment duty that can be collected is, there- 
fore, ii25, that is, one-fifth of the difference between £1250 and 
£625. But of that total, £90 has been paid by A, so the tax on B 
is £125 less £90, or £35. He thus pays £5 extra for making his 
money so fast. 

Twenty years later, C underleases the property for twenty-one 
years to D. There are now three parties at interest : D, who has 
the property in use ; C, who holds D's lease and has a reversion 
in expectancy on his own leasehold interest after twenty-one 
years, or for a period of fifty-eight years remaining after D's 
lease falls in ; and B, who has a reversion in expectancy after 
seventy-nine years. The consideration for the lease paid or 
agreed to be paid by D and other factors now show a site value 
of £2000 on this third "occasion." The last site value was £1250, 
hence the increment on this "occasion" is £750, and in computing 
the tax there is to be deducted the tax on 10 per cent of £1250, 
leaving a tax computable of £125. But this has to be appor- 
tioned between C and B, only one of whom, namely C, has 
realized his increment. The computation is as follows : £2000, 
the site value, at 4 per cent, would yield £80 a year ; £80 a year 
for the next fifty-eight years, the term of D's lease, is worth now 
£1794, 8s. Hence, C's interest is to B's interest as 1794.4 is to 
2000. C, therefore, pays that fraction of £125, or £116, I2s, 9d. 

The Incidence of this Tax 

The imposition of these taxes, nay, even their first whispered 
announcement, at once depressed the value of land. This is not 
only in accordance with the accepted theory of the incidence of 
these taxes, but an acknowledgment of that effect is written 
into the act itself in several important particulars. First, there was 
the rule that the original site value should be reckoned as of a 
date before the effect of the announcement of the new taxes was 
felt. Second, there was the concession that the highest price 
that was obtained at any time during twenty years before the 
new taxes were levied should be the basis from which to start. 
The consequence was that the owner at the time of the imposition 



THE INCREMENT TAX 719 

of the tax was obliged to assume the whole burden of the tax 
forever, in so far as the amounts thereof could be foreseen. For 
each purchaser or lessee would naturally deduct from the price 
he would be willing to pay the "present value" or capitalized 
value of the tax that he would have to pay and also that of the 
taxes which his successors would have to pay and which in turn 
they would deduct from him. In computing the effect there are 
two uncertain factors — one is the amount of the increment, and 
the other is the times w^hen the occasions will occur. These two 
uncertainties introduce into the study of the incidence of these 
taxes certain very interesting and complex considerations which 
will be considered in another place. 

The Reversion Value Duty 

The reversion duty in England rests on a practice common in 
that country and not nearly so common in the United States of 
leasing land for long terms. The lessee then builds on the land, 
makes various improvements, and may, under the conditions of 
the original lease, sublet. At the termination of the lease the 
whole property reverts to the owner of the fee. The terms of 
the leases are usually such as to protect the interests of the 
various parties. But they vary greatly. If, for example, it is 
expected that the buildings put up by the tenant will outlast 
the lease, or if he is required by the lease to keep such improve- 
ments as will outlast the lease, then there may be some com- 
pensation to be paid by the landlord at the termination of the 
lease, or it may be that he makes an abatement in the rent charge 
to cover such improvements. But since all the developments 
of the future cannot be foreseen when a long lease is written, it 
not infrequently happens that a considerable windfall accrues 
to the landlord. This is the more likely to happen in the case of 
land that is rapidly appreciating in value. It was to cover these 
windfalls, which are somewhat akin to an "unearned increment," 
that the Reversion Value Duty was added to the list of the new 
taxes. That, despite all attempts to equalize the benefits which may 
have been made in the original lease, an added value is found to 
fall to the landlord is stated by Dr. Napier as follows : "It usually 
happens that on the expiration of a building lease the owner of 
the fee simple expectant upon the lease comes into a property 



720 SELECTED READINGS IN PUBLIC FINANCE 

worth much more than the fee simple of the property at the time 
when his predecessor in title made the lease." This profit, con- 
sisting of the increase in site value and whatever building^ or 
improvement values there may be over and above what was an- 
ticipated by the terms of the lease written long years before, is 
the subject of the reversion duty. 

The theory of the tax is that the owner of the fee simple has 
received a safe interest on his money or investment for many 
years and on the termination of the lease gets back his money 
or the principal with added values. Such a windfall is to be 
shared with the government. Since the holder of a long lease 
is regarded as the owner with reference to underleases it may 
also fall on a tenant. 

The rate of the reversion duty is one pound in every full ten 
pounds of the value of the benefit accruing by the reversion. 
The rate is lower than that of the increment duty by reason of 
the fact that the benefit is not wholly economic rent. In pro- 
portion to the value of the whole property it is possible, however, 
that in many case^ this tax will be heavier than the increment- 
value duty. It is apparently not intended that an increment duty 
and a reversion duty shall both be collected for that portion of 
the benefit which is increment in the site value, in. case the 
"occasions" overlap or coincide. 

For obvious reasons the values and methods of valuation for 
the reversion duty are not those for the increment-value duty. 
In the first place, the thing to be valued includes buildings as 
well as the underlying earth. The original value, moreover, is 
that at the time the lease was written and is to be computed on 
the basis of all payments and considerations in the lease. The 
value of the property at the end of the lease is our old friend 
''total value," as explained in connection with the increment- 
value duty. There is deducted from this before the original 
value is subtracted the present value attributable to any ex- 
penditure by the lessor during the life of the lease, and any com- 
pensation he may have to pay to the lessee by the terms of the 
lease. 

Exempt from this duty are agricultural lands, and leases for 
short terms (which for this purpose are those not exceeding 
twenty-pne years), leases covered by the Minerr.l Rights Duty, 
and leases of public property, or such as is used for charitable. 



THE INCREMENT TAX 72 1 

educational, and other quasi-public purposes not resulting in 
private profit. 

The reversion duty is not a lien on the property. ThQ bene- 
ficiary of the reversion must report to the commissioners under 
heavy penalty for failure. But there is no danger that the col- 
lection will be jeopardized, because there is in England so much 
publicity as to the essential facts arising under the administration 
of the income tax and of the local rates that concealment from 
the officials is practically impossible. 

NUMERICAL EXAMPLE 

Selling value of the entire property at the end of the lease £2000 

Expended by lessor on betterments. £300 

Compensation for fixtures 200 

Total deductions 500 

Amount that the lessor receives by reversion £1500 

Original values : 

Premium paid for lease £300 

Annual rental of £20, taken at twenty-five years' purchase. . . 500 

Total original 800 

Benefit taxable £700 

Tax at 10 per cent, £70. 

The Undeveloped Land Duty 

Undeveloped land is defined as follows : " Land shall be deemed 
to be undeveloped land if it has not been developed by the erec- 
tion of dwelling houses or of buildings for the purpose jof any 
business, or trade, or industry other than agriculture." Land 
once developed may revert by virtue of nonuse, or owing to the 
buildings becoming derelict. Land in process of development, 
or being marketed, is considered developed if £100 per acre has 
been spent on roads, sewers, etc., within the past ten years. 

The assessment is on our old friend the "assessable site value," 
ascertained as explained above. For the first five years the 
assessment is on the "original site value" as of the 30th of April, 
1909. A new assessment or valuation is to be made every five 
years. In the interval between the quinquennial assessments 
lands passing into the "undeveloped" class must be valued. 
When the increment tax has been paid the "site value" is re- 
duced by the amount of the increment that was taxed. 



722 SELECTED READINGS IN PUBLIC FINANCE 

Exempt are : Land whose site value is less than £50 per acre ; 
parks, woodlands, and the like devoted to public use, or recrea- 
tion, or to which the public enjoys access amounting to a public 
benefit. In the case of undeveloped land actually in use for 
agriculture, if the sight value be over £50 per acre, and the sight 
value for purposes other than agriculture exceeds the value for 
agriculture, the excess is considered the undeveloped value, and 
that excess is taxable. But small holdings of this class not worth 
over £500 are exempt. A free acre of land is allowed with a 
dwelling house, and gardens or pleasure grounds not in excess of 
five acres, whose value for the purposes of building, etc., does not 
exceed twenty times the annual value adopted for the income tax, 
are exempt. 

- The Rate 

The rate of the Undeveloped Land Duty is one-half penny for 
every twenty shillings of assessable site value. Interpreted in 
the common terms of American tax rates, the rate is $2.08 per 
thousand, or twenty cents and eight mills per $100, or two mills 
and a little over per $1. By itself it is a trivial tax. But con- 
joined to and added to the other taxes and charges falling on land 
it is not unimportant. As the tax could not be determined until 
the valuation was completed it was made payable retroactively to 
and for the year ending March 31, 1910, and each subsequent year. 

The tax is a sort of penalty for not using the land or for not 
selling or leasing it so that it may be used. 

The tax is not expressly made a lien on the land, but the act 
contains the dictum that the tax "shall be borne by that owner 
{i.e. 'the owner for the time being' presumably when assessed) 
notwithstanding any contract to the contrary." It is not very 
probable that the tax can be shifted by the owner, but if it should 
be the case that economic forces dictate a shifting, say to the 
purchaser, this dictum of the law will be as potent as Canute's 
command to the tide, of which it smacks. 

Numerical Ilktstration 

This tax is so simple in the main that no example is necessary, 
except for the case of land used for agriculture pending the op- 
portunity to sell it at a profit. Thus ''Blackacre" may have an 
agricultural value of £500 and a "site value," in view of the 



THE INCREMENT TAX 723 

growth of the neighboring town, of £1000. The duty is on the 
difference, or £500. If subsequently leased for market gardens its 
agricultural value may rise to £700 and at the same time the site 
value for a factory may be £1500; then the duty is on the £800. 

Mineral Rights Duty 

The fourth of the new duties proved to be the largest revenue 
getter, during the first period of the life of the new taxes. Down 
to the 31st of March, 1913, it had yielded in all £1,250,000 
($6,087,000), while all the other three together yielded only 
£250,000 ($1,217,000). 

The tax with which we now deal is not a tax on the capital 
value of the minerals. It is a tax on the annual or rental value, a 
basis as familiar to the English people as it is unfamiliar to us. It 
is based on the annual rental value of all rights to work minerals 
and of all mineral way-leaves.^ The rate is one shilling for every 
twenty shillings of the rental value paid by the working lessee, 
or its estimated equivalent if the proprietor works the mine him- 
self. The year for the rental is the year ending September 30th... 
If the proprietor receives an increased rent in consideration of 
making developments, the amount he expends on the development 
is deducted. If the working lessee holds from one who is himself 
a lessee, intermediate between the proprietor and the working 
lessee, the latter may deduct from the rent he pays the propor- 
tionate part of the tax. Clay, brick clay, or brick earth, sand, ■ 
chalk, limestone, and gravel are not minerals subject to the duty. 

The reversion duty is not payable on the termination of a 
mining lease, nor is the grant of such a lease an "occasion" 
under the increment value duty. 

But although mineral rights are subject to such a heavy tax, 
that is not all of these new" taxes which may fall on minerals in 
some cases. In the first place, when minerals are sold, apart 
from the land, as if they were a separate parcel of land, they are 
liable, as other land, to the Increment Value Duty, on their 
capital value. The same is true if they pass by death when they 
are not being worked. 

Minerals which were being worked at the time of the passage 

1 A " way-leave " is the right to convey minerals over or under private lands, 
or to use shafts or tunnels for ventilation, or drainage, passing over or under 
private land. 



724 SELECTED READINGS IN PUBLIC FINANCE 

of the act, and continue to be worked without an idle period of 
two years or more, pay only the Mineral Rights Duty. 

But special provisions as to the Increment Value Duty are made 
to apply to minerals opened and worked that were not being 
worked when the act was passed, or which may be opened and 
worked after any period of two years or more of idleness. In 
such cases there is an ingenious application of the Increment 
Value Duty which turns it from a lump sum ''occasional" tax 
into an annual tax. In assessing this form of the Increment Value 
Duty the first step is to ascertain the original capital value at 
the time the act was passed, or on becoming idle for a period of 
more than two years. This is done as nearly as may be according 
to the methods already explained for ascertaining site values. 
The next step is to compute the annual value corresponding to 
this capital value, which is fixed at "two twenty-fifths parts of 
the capital value," which cumbersome fraction is, of course, 
equivalent to 8 per cent. If, when the minerals are worked, the 
annual rental in any year exceeds the sum fixed by the second 
step as the original value, then the increment tax is based on 
that excess. If, however, a part of the rental is return for capital 
expended in development work during the fifteen years, a de- 
duction is allowed. 

It is not intended that both the annual increment value tax 
and the full Mineral Rights Duty shall be paid, but whichever 
is the higher is the measure of the total to be paid, the other, 
if paid, being allowed as a deduction. 

General Comment on all Four Taxes 

As we have seen, these four taxes are cunningly woven to- 
gether. The undeveloped land tax might appear to stand alone, 
but there is one important respect in which it holds up the others. 
It has been noted that for the Increment Value Duty the owner 
will endeavor to have a high value fixed in the original assess- 
ment, for then the taxable increment thereafter will be smaller. 
But if he succeeds in this endeavor and his land is "undevel- 
oped" he will have to pay a higher undeveloped land duty than 
otherwise. Then, too, a high original value fixed for the In- 
crement Value Duty may rise up to plague his heirs when the 
estate duties (inheritance taxes) have to be paid. Moreover, 
there is always the possibility of increased rates. 



THE INCREMENT TAX 



725 



Aside from one or two harsh features the act is full of tender- 
ness and mercy for the taxpayer. The taxes, except for the Un- 
developed Land Duty, fall only on realized values, and deductions 
and exemptions are allowed with the utmost liberality. In some 
cases the allowances, as for example those for advertising and 
good will, are almost fanciful. 

The Yield 

The Report of the Commissioners of His Majesty's Inland 
Revenue for the year ended March 31, 191 5, gives the following 
as the "Net Receipts" of the several duties for each of the five 
years since they have been in force. 



Duty 


Year 
1910-U 


Year 
19H-12 


Year 
1912-13 


Year 
1913-14 


Year 
1914-15 


All Five 
Years 


Increment Value Duty . 
Reversion Value Duty . 
Undeveloped Land Duty 
Mineral Rights Duty . . 


257 

2,351 
506,290 


;^6,I27 
22,621 
28,947 

436,193 


^16,981 

47,974 
97,852 

273,915 


;^34,i99 

80,435 

274,916 

345,343 


;^48,3i6 

19,313 

8,652 

337,680 


^105,750 
170,600 
412,718 

1,899,421 


Totals 


;^509,025 


;^493,888 


^^436,722 


;^734,893 


;^4i3,96i 


^2,588,489 



There are several features of these results that need a little 
explanation. 

The only one of these duties that went into full effect at once 
was the Mineral Rights Duty. The others could not even begin 
until the new Doomsday Book was completed. By March, 191 5, it 
was reported 95 per cent of all the land in Great Britain had been 
valued. The report, however, states that owing to the depletion 
of the staff by mobilization and the departure to the war of the 
owners and others who had a voice in the valuations all further 
work on the valuations was suspended. In 1914 the collection of 
the Reversion Value Duty and of the Undeveloped Land Duty 
were suspended by court decisions adverse to certain features of 
the valuation method. In the nature of things the Increment 
Value Duty could not be expected to yield much at first, as the 
"increment" ripens only with the passage of time. 

I have tried to guess what the rate of increment was. This can- 
not be done with an accuracy, as the Report does not give the 
"assessable site" value; it gives only "total values." The "total 
values" for all lands are reported as £4,555,285,522. The 



726 SELECTED READINGS IN PUBLIC FINANCE 

*' occasion" valuations made for the purposes of Increment Value 
Duty to March 31, 191 5, gave £490,920,918. How much of this 
was site value it is impossible to ascertain. Various writers (see 
Stamp, British Incomes and Property, pp. 339 ff.) have estimated 
the site value as being anywhere from one-fifth to one-half of the 
total value. The best guess seems to be one-third. In number the 
"units" which were revalued were about one-tenth the whole 
original number of valuations made, and if we allow for the incre- 
ment, about one-tenth of the original values were revalued. So 
that it is possible to guess that the pieces revalued were fairly rep- 
resentative of the whole. Beyond this point the estimate is still 
further guesswork. The only sure facts are the total increment 
duty assessed, which was £153,234, representing a total incre- 
ment taxed of £766,170. On each of the pieces taxed there was 
exempt 10 per cent of the original site value, whatever that was, 
and of the greater mass of the revalued properties the increment 
was less than 10 per cent, nil, or minus. The best that can be 
done is to guess that the 9937 lucky pieces that were also so 
unfortunate as to have to pay the tax increased in value not 
more than 14 per cent in the five years. But this is only a very 
rash guess. 

The Incidence of Increment Value Taxes 

The most interesting scientific problem in connection with 
these taxes is their incidence, — upon whom do they fall and 
how. 

For a study of this the essential features of increment value 
land taxes are (i) that they are based on the increase in the 
capital value of land ; (2) that they are assessed and collected on 
"occasions" at more or less irregular intervals of time, when 
some event such as a sale or a transfer on account of death 
permits the increase in value to be ascertained. 

According to the prevailing theory of the incidence of all land 
taxes the burden falls on the owners and not on the tenants or 
any indirect users, such as those who consume the products of 
the land. Also, in so far as the future taxes can be calculated 
in advance, the burden of them is capitalized and thrown entirely 
upon those who are owners at the time of their enactment ; that 
is, so far as any future owner is concerned the tax is amortized, 
is dead, in that he acquires the property at its value, based on 



THE INCREMENT TAX 727 

all earnings, less a sum which put at interest would pay the 
taxes. This general rule, applicable to all kinds of land taxes, 
would have little bearing if the taxes were made so heavy as to 
appropriate the full annual ground rental (in that case not 
merely the increment) and thus materially alter the entire eco- 
nomic organization of society. 

This broad principle being accepted, the next problem is to 
calculate the amount of the depreciation in the private-property 
value of the land (the total use value not being affected) which 
will be occasioned by the enactment of a law imposing any given 
increment value tax. This problem differs from that presented 
by a tax based on the entire capital value of land payable at 
regular intervals, and from any regularly recurrent tax that 
takes a definite proportion of the annual rental value. In both 
of these cases we have only to capitalize the amount of the an- 
nual tax and the result is the amount by which the value of the 
land is depreciated. The main difficulty in the case of increment 
value taxes arises from the fact that the increment value tax 
leaves the owner in full enjoyment of the rentals until an 
"occasion" arises. Thus they can never appropriate or destroy 
all present value. The depreciation caused is therefore less than 
that which would be caused by a regular annual tax in approxi- 
mately an equal amount. Further, unless it is to his interest to 
sell the land, the owner will not have to pay the tax until his 
death. 

Inasmuch as the increment taxes are uncertain as to the date 
of their payment, they become, so far as calculable at all in ad- 
vance, insurable risks, and to that extent they are analogous to 
any foreseeable inheritance tax which may be insured against 
as a risk. Indeed, in some aspects, these taxes are analogous to 
an added inheritance tax imposed on inheritances in the form 
of landed estate. 

In their more common forms and in the case of the British 
increment taxes these taxes are primarily for revenue purposes 
and only incidentally, or in lesser degree, designed to change 
existing social and economic conditions. Thus the maximum 
rate of the British Increment Value Duty is less than 20 per cent 
of the increment. Similarly, the German Imperial Zuwachs- 
steuer has a rate which approaches 30 per cent of the increment 
as a limit. If, for fiscal or for social reasons, the rate should 



728 SELECTED READINGS IN PUBLIC FINANCE 

eventually be raised so as to approach lOO per cent, the whole 
problem is altered; the effect will be different not merely in 
degree, but in kind, since it would influence one of the main 
motives to land ownership. 

Every increment value tax, at the time of its enactment, predi- 
cates two values in land. One is the present value, and the 
other is the future increase in that value. But on closer analysis 
the present value in turn contains two elements : one is the 
capitalized value of the income that is now being received or 
which could hypothetically be received by using the land, as- 
suming that this will not decrease in the future; the other is the 
present value of such additions to the income as are expected 
to accrue in the future, in so far as those additions can be fore- 
seen at the present time. There may be, some day in the future, 
now unexpected additions to the income (real or potential), the 
so-called windfalls which will, on the day they can be foreseen, 
add to the value of the land. But these add nothing to the pres- 
ent value. The increment value tax falls on two elements, one 
represented in the present value of the land and one not. Only 
in so far as it falls on the value of the expectation of future 
value now represented, in discounted form, in the present value 
can the increment tax reduce present values. The tax on the 
unexpected will in turn fall entirely on him who is the owner at 
the time the unexpected becomes foreseeable. 

The depreciation, therefore, that will result from the enact- 
ment of an increment value tax is that due to the necessity of 
providing a fund for the care of the reduction in value caused by 
the tax as an invasion of the expected increase. 

Although so far as any selected pieces of land are concerned 
the future increase in values may prove to be very irregular, yet 
the new taxes, regarded as revenue measures, obviously assume 
that by and large there will be a steady growth in land values. 
To study the effect on present values we must assume some rate 
of growth, and for simplicity it must be a regular rate. What 
rate to assume is a question which involves some difficulties. If, 
as economists teach us, rent is to be looked at as a differential 
value attaching to certain pieces of land as compared with the 
least advantageous piece of land (no-value land) then the pro- 
priety of adding these differentials together and striking an 
average is decidedly questionable. But if rent, as most business 



THE INCREMENT TAX 729 

men seem to hold, is to be regarded as the differential value 
attaching to land as against all other possible uses of funds, then 
we may.properly strike an average. This is, perhaps, the attitude 
of the average investor. 

As a preliminary example and to illustrate the method which 
it is here proposed to use, let us take the case of a landowner 
who confidently expects that his rentals will increase 10 per cent 
every seven years, and who does not now intend to sell and 
hence assumes that the first tax will be paid on the "occasion" 
of his death. If his expectation of life is twenty-eight years, 
he might set down the end of the twenty-eighth year as the time 
or "occasion" for the payment of the first tax. 

Theoretically we might set up the hypothesis that the incre- 
ment will go on growing forever. But this has no practical 
meaning. Such an assumption soon runs into those unreasonable 
figures which one plays with in computing compound interest, 
for example, since the year of our Lord. Practically the "busi- 
ness man's horizon is always limited. He expects the increase 
to stop somewhere, and it is not an unreasonable assumption 
that he will refuse to pay good money down now for any hoped- 
for gain beyond, say, the average expectations of life of his 
group or, let us say, more or less arbitrarily, beyond twenty- 
eight years. Hence we may assume that he will regard the 
rentals as settling down to a straight perpetuity after twenty- 
eight years. 

The following examples are worked on the basis of 4 per cent 
interest, and all capital values relate to $1 a year rental to 
begin with. 

Under the foregoing assumption our landowner would reckon 
somewhat as follows : 

I am to receive $1 a year for the first seven years ; 

Then, $1.10 a year for the second period of seven years ; 

Then, $1.21 a year for the third period of seven years; 

Then, $1,331 a year for the fourth period of seven years. 

At the end of the twenty-eighth year I shall have, to pass on, 
a property yielding $1.4641 a year and worth then, at 4 per cent, 
$36.60 for every $1 of present income. 

As twenty-eight years is my expectation of life, my heirs will 
then have to pay the Increment Value Duty on this, which I 
believe will be the first "occasion." 



730 SELECTED READINGS IN PUBLIC FINANCE 

Now the present value of the series of annual payments above 
set down, plus the present value of $36.60 to be received twenty- 
eight years hence, would be $30,924, provided there were no tax 
to pay. But it is less by the present value of the tax, and being 
less the tax is correspondingly a trifle larger than one-fifth of 
the difference between one and one-tenth times $30,924 and $36.60. 
To find the present value as influenced by the Increment Value 
Duty we proceed as follows : The present value of the property 
equals $30,924, less the present value of the tax. The tax equals 
one-fifth the difference between $36.60 and i.io times the present 
value of the land. From this it is easily computed that the present 
value equals $30.74, and the tax is $0,557 payable twenty-eight 
years hence. The reduction in present value caused by the tax is 
$0.1856, which is 0.6 per cent of the value unaffected by the tax. 

If we were to assume that the rentals double every seven years 
for twenty-eight years, the present value is $169.18, the future 
value $400, the tax $14.26, and the reduction '].']'] per cent. 

These illustrations will suffice to show the principles. 

Some of the propositions concerning these taxes are inter- 
esting : 

(yA) If there be any material exemption based on a percentage 
of original value, as in the British tax, the more frequently the 
"occasions" occur, the less the revenue. Thus, in our first 
example, when the property was assumed to increase in value 
10 per cent every seven years, if an " occasion" fell every seventh 
year there would be no revenue at all. 

Hence, in a country where transfers of land are frequent, the 
exemption (or abatement) should take the form of a percentage of 
the increment or a lower tax rate, and not of the original value. 

(J5) Even if the tax is 100 per cent of the increment, the 
present value is never entirely wiped out nor is the owner de- 
prived of all enjoyment of the increments. Thus, if we assume 
that land will double in value every seven years (which is cer- 
tainly very rapid) and the tax takes the whole increment, and 
that the first occasion is at the end of twenty-eight years, the 
present value is still $75.10 per $1 rental at the start as against 
$183.45 untaxed (or $25.00, if there were no expected increment). 

(C) For any considerable area of land the increment value 
taxes are not likely to yield much revenue, unless the rates are 
very high and the exemption or abatement next to nothing. 



THE INCREMENT TAX 731 

(Z>) Under any conditions that are at all within the reason- 
able expectations, the yield of an increment-value tax will be 
very small for the early years. It takes considerable time for 
the increments to ripen. 

The Incidence of the Undeveloped Land Duty 

The effect of the Undeveloped Land Duty is simpler than that 
of the Increment Value Duty. Thus, in the English tax it is one- 
half penny in the pound value, or a little over one-fifth of i per 
cent, and if the land were to stay undeveloped means that for 
every $100 of value before the tax the new value would be $95. 
But as it is natural that undeveloped land should ripen in some 
period of time and the tax disappear, the effect is less. The tax 
at one-fifth of i per cent for each dollar a year income for four- 
teen years is about $2.01. Hence, under this supposition the 
value is reduced from $100 to 



Comparison of the British Increment Value Duty with the 
General Property Tax 

Under the general property tax the increment of value in land 
becomes subject to taxation as fast as it matures. Thus, if a 
piece of land is worth $1000, and seven years hence is found to 
be worth $1500, it will then be assessed on the basis of $1500, 
the $500 of increment value being included. Moreover, as long 
as this value continues to exist, it is taxed at the regular rates 
of the general property tax. 

If we take the same examples which we used to illustrate the 
working of the British Increment Value Duty (namely, (i) a 
case in which the value increases 10 per cent every seven years 
up to the twenty-eighth year, and (2) a case in which the value 
increases 100 per cent every seven years up to the twenty- 
eighth year), M^e have the following computations as to the re- 
sults of the general property tax, assuming the tax rate to be 
I per cent of the true value, and 4 per cent as a basis of 
capitalization. 

EXAMPLE NO. 1 

For every $1 of income (ground rent) which the owner is re- 
ceiving the government is also receiving 25 cents. Both the 



732 SELECTED READINGS IN PUBLIC FINANCE 

owner's and the government's shares increase by the condition 
of the problem lo per cent every seven years. Thus the taxes 
on the increment alone will be 

For the 8th to the 14th years, inclusive, at $.025 $.i7S 

For the 15th to the 21st years, inclusive, at .0525 3675 

For the 21st to the 28th years, inclusive, at .08275 57925 

Total taxes $1.12175 

and further, the government continues presumably forever there- 
after to collect $0.116025 a year on the accumulated increment 
alone. 

Under the British increment value tax the increment was found 
to be taxed $0,557, ^^^ this sum was not collected until the 
twenty-eighth year. Its present value is $0.1856. Now the pres- 
ent value of the series of taxes on the increment alone under 
the general property tax, including the perpetuity, is $1.48. But 
of this we may use only four-fifths for comparison with the 
$0.1856 of the British increment tax, because that was computed 
on the basis of $1 a year total ground rent, and the $1.48 for 
the general property tax was computed on the basis of $1.25 a 
year total ground rent, of which $1 went to the owner and $0.25 
to the government. Hence the comparison is between $0.1856 
(British) and $1,184 (general property tax), or 6.38 fold. 

Thus we find that the general property tax on the increment 
is more than six times as heavy in the related example as is 
the British increment tax. 

But it must be borne in mind that the effect of the permanent 
appropriation of i per cent of the capital value of all land 
(including the value of the increment) lessens materially the 
value of all private ownership of land. The series of rent pay- 
ments on land assumed in our example which we found above 
to be worth $30,924 untaxed would, if subject to the general 
property tax at i per cent, be worth only $24.74. 

EXAMPLE NO. 2 

If the land doubled in value every seven years for twenty- 
eight years, then, following the same method as above, the gov- 
ernment would collect in taxes on the increment alone, under the 
general property tax, $20.25, ^^^ have a tax interest of $3.75 
a year in perpetuity thereafter, all on the increment alone. 



THE INCREMENT TAX 733 

This series of taxes (including the perpetuity) has a present 
value of $39.51, and four-fifths of that is $31.61. As against this 
the British increment value tax would be $42.78 receivable 
twenty-eight years hence, of a present value of $14.26. In this 
example the general property tax is 2.2 times as heavy as 
the British increment tax. The present value of the private 
owner's interest in the land under the general property tax 
would be $115.15 as against $169.18 under the British increment 
value tax. 

If, therefore, the aims of the increment tax are (i) to get 
revenue from the increment value, and (2) to reduce the social 
significance of land ownership, it is clear that the method of in- 
crement taxation, unless the rate is much higher than that of 
the British increment value tax, is much inferior to the general 
property tax even at so low a tax rate as i per cent. 

In short, we are getting much more in taxation out of the 
increment in land value in the United States to-day than Great 
Britain could ever get by the increment value tax at its rate of 
one-fifth of the taxable increment, and, for that matter, even at 
much higher rates. 

Furthermore, as frequent transfers will nullify the British 
tax while they merely serve to enhance the general-property-tax 
revenues, the effectiveness of the general property tax is still 
greater. 

79. The German Imperial Tax on the Unearned Increment. — 

Professor R. C. Brooks has written the following account of the 
German imperial tax on the increment of land value :^ 

In an earlier issue of the Quarterly and elsewhere^ may be 
found a discussion of the principles upon which the new German 
unearned-increment taxes are based, together with some account 
of the forms these taxes have assumed in a few of the larger 
municipalities of that country. A brief statement regarding the 
subsequent development of the movement, culminating in the' 

1 Reprinted from the Quarterly /our nal of Economics, Vol. XXV, pp. 682-709. 

^ R. Brunhuber on "Taxation of the Unearned Increment in Germany," in this 
Quarterly, Vol. XX, pp. 83-106 (November, 1907) ; also article by the present 
writer on " The New Unearned Increment Taxes in Germany," Yale Review, Vol. 
XVI, pp. 236-261 (November, 1907). 



73-4 SELECTED READINGS IN PUBLIC FINANCE 

passage of an imperial law on the subject, February 14, 1911/ 
may be of interest at this time. 

A tax of this sort was introduced by the Naval Department of 
the German Imperial Government in Kiao Chau as early as 
1898. First adopted at home by Cologne in 1905, the new tax 
promptly started upon a triumphal progress through the German 
municipalities. Before the end of 1907 it had been introduced 
by eleven cities, among which, besides Cologne, the more con- 
siderable were Dortmund, Essen, and Frankfurt-am-Main. Since 
that date the accessions have continued with increasing* rapidity 
until by April i, 1910, no fewer than 457 German cities and 
towns had adopted the unearned-increment tax.^ In Prussia 
alone 159 cities (Stadte) and thirteen rural counties (Landkreise) 
had introduced it prior to 1910. As the new form of taxation 
found most favor in rapidly growing places of large or consid- 
erable population the true significance of the foregoing is greater 
than the bare figures might indicate. Of the Prussian cities and 
towns which had introduced the tax prior to April i, 1910, 
twenty-seven had more than 100,000 inhabitants, seventy-two 
between 20,000 and 100,000, and sixty-four between 5000 and 
20,000. Berlin (2,018,279 pop.), after rejecting the new prin- 
ciple in 1907, finally accepted it in March, 1910. Nearly all the 
hustling suburbs of the metropolis had anticipated it in this 
action. Among other large cities not already mentioned which 

1 The text of the law with a brief introduction is pubUshed in convenient form 
under the title Zuwachssteuergesetz v. 14. Februar, 1911, by Heymann, Berlin, 
36 pp. A very useful commentary with the complete text of the law has been 
issued by Dr. Walter Boldt, Stadtrat in Dortmund, under the title : Das Reichs- 
zuwachssteuergesetz v, 14. Februar, 191 1, mit Anmerkungen, Erlauterungen und 
Beispielen fiir Steuerberechnungen, also published by Heymann, 171 pp. Finally 
the administrative orders and forms {^Ausfilhrungsbestimimaigeii) for the execu- 
tion of the law, ofificially issued March 27,1911, have been reprinted by the 
same publisher in a pamphlet of 80 pages. Among other texts of earher date 
which have been found useful are Justizrat Herman Kausen's Die Reichswertzu- 
wachssteuer, Koln, Neubner, 1910, 155 pp.; Georg Haberland's Die Wertzu- 
wachssteuer, Berlin, Unger, 1910, 60 pp. ; and the Protokoll d. Hannoverschen 
Stadtetags, Hannover, Janecke, 1910, 69 pp., which contains the government's 
bill in its original form together with the changes made at its first and second 
readings. 

2 Of these 457 cities and towns, 301 were in Prussia, 77 in Saxony, 22 in Hesse, 
and the rest scattered throughout the other states of the German Empire. Cf. 
Boldt, p. 8. 



THE INCREMENT TAX 735 

have introduced the unearned-increment tax are Hamburg (874,- 
878 pop.), Leipsic (503,672), Breslau (470,904), Kiel (163,772), 
and Wiesbaden (100,953). Altogether it is estimated that by 
April I, 1910, the tax had been introduced into German cities 
and towns with an aggregate population of 15,000,000. 

In 1909 the Reichstag devoted a great deal of attention to the 
reform of imperial finances. The possibility of employing the 
unearned-increment tax as one of the means to this end was first 
seriously considered by the Imperial Diet in that year. Every 
party faction in the Reichstag expressed itself favorably upon 
the general principle involved, — a remarkable tribute to the 
impression made by the municipal experiments and also to the 
thoroughness of the propaganda of the land reformers and 
economists on the subject. However, the Bundesrat postponed 
action on the ground that a thorough study of various kinds of 
real estate, and also of the interests of the municipalities which 
had already introduced the tax, should be made before a law on 
the subject could be properly drafted. Temporarily the place 
in the imperial budget to be occupied finally by an unearned- 
increment tax was filled by a stamp tax (of 2^ of i per cent) on 
the selling price in real-estate transactions, and the government 
was given until April i, 191 1, to bring in the proposed unearned- 
increment tax. 

Almost a year before the latter date, however, the imperial 
chancellor presented a bill on the subject to the Reichstag. 
The reason assigned for this prompt action was that it had be- 
come necessary to put an end to the uncertainty prevailing in the 
real-estate market and among the municipalities of the country. 
After thorough consideration and numerous amendments the 
bill finally passed the Reichstag on February i,^ and received 
the imperial signature on February 14 of the present year. 
Formally the law went into effect on April i, but it contains 
retroactive features that will be discussed later. 

As compared with the earlier municipal legislation on the 

1 On final passage the bill was carried by a vote of 199 to 93, 20 members not 
voting. For the bill the Conservative, National-Liberal, Economic-Unionist, and 
Free Conservative parties voted almost solidly. A majority of the Centrum and 
a part of the Independent party also voted for it. The Social-Democrats and a 
part of the Independent party voted against it, while the Poles abstained 
from voting. 



736 SELECTED READINGS IN PUBLIC FINANCE 

subject the new imperial law is distinguished by its greater length 
and thoroughness. Hence any discussion of its text, even one so 
general as that attempted in the present article, must of neces- 
sity be somewhat detailed and mercilessly dry. Even so it must 
be understood that many of the following statements are subject 
to further qualification and definition. Those interested in the 
minutiae of the new law are referred to the accompanying trans- 
lation of its text. 

A small number of exemptions from the tax are allowed. The 
Empire itself, princes of the German states, the states themselves, 
and municipalities are on the free list. Associations for coloniz- 
ing purposes, for the housing of the working classes, and similar 
semi-philanthropic purposes are also exempted, provided they 
limit themselves strictly to 4 per cent interest annually upon their 
investments. A number of carefully defined transactions con- 
nected with inheritances, marriage settlements, and the redrawing 
of boundary lines among scattered strips of real estate are freed 
from the tax. Sales of whole parcels of real estate not to exceed 
20,000 marks in value, or of unimproved real estate not to exceed 
5000 marks, are exempt, provided that the income of the seller 
and his wife in the preceding year did not exceed 2000 marks, 
and provided further that neither of them is engaged in the real- 
estate business. Unearned-increment taxes which amount to 
less than 20 marks are not collected. 

The method of computing unearned increment is, of course, 
fundamental in all legislation of this sort. Three main items 
are involved. Stated in the simplest forms they are (a) the 
price paid for the property at the last purchase, (b) the cost 
of permanent improvements since made upon it, and (c) the 
selling price. Roughly speaking, the unearned increment is the 
difference between the selling price and the other two items. 

One of the hardest fights made in the Reichstag over the bill 
turned upon the point as to whether in calculating unearned 
increment the cost of permanent improvements should be sub- 
tracted from the selling price or added to the purchase price. In 
other words, using the notation indicated above, should incre- 
ment be figured as c — {a ■}- b), or as {c — b) — a? Of course 
the gross amount of the result would be the same by either 
method. But, as will be shown later, the rate of tax is deter- 
mined by the percentage of the unearned increment to the cost 



THE INCREMENT TAX 737 

price plus such additions to it as the law allows. If, now, the value 
of permanent improvements made since the last purchase be 
added to the cost, the percentage of increment will be materially 
reduced, and consequently the tax rate. 

Omitting- everything except the three elements immediately 
concerned, the following illustration may serve to bring out the 
point clearly. A real-estate operator buys a piece of unimproved 
property for {a) 5000 marks, erects upon it a building worth 
{b) 80,000 marks, and sells the property for (c) 110,000 marks. 
Deducting the cost of permanent improvements from the selling 
price (110,000 marks minus 80,000 marks), the result is 30,000 
marks, and further subtracting irom this the original cost of the 
land (30,000 marks minus 5000 marks), the gross amount of 
the unearned increment is 25,000 marks. If, on the other hand, 
the cost of permanent improvements be added to the original 
cost of the land (80,000 marks plus 5000 marks), and the sum, or 
85,000 marks, be subtracted from the selling price of 110,000 
marks, we obtain the same result, or 25,000 marks, as the gross 
amount of the unearned increment. In the former case, however, 
the percentage of unearned increment is determined by the ratio 
of increment to cost price of the land alone, i.e., of 25,000 marks 
to 5000 marks, or 500 per cent. In the latter case the percentage 
is determined by the ratio of increment to the cost price of the 
land plus permanent improvements, i.e., of 25,000 marks to 85,000 
marks, and the result is a percentage of increment of only 29.4 
per cent. Now a 500 per cent of increment would be taxed at 
the maximum rate, 30 per cent,^ — yielding under the illustration 
7500 marks to the public treasury. An increment of 29,4 per 
cent, on the other hand, would be taxed at a rate of only 11 per 
cent, yielding in the present instance only 2750 marks. 

Naturally the land-owning interest favored the latter method 
of computation. As originally drafted, however, the bill pro- 
vided that the value of permanent improvements should be sub- 
tracted from the selling price instead of being added to the 
purchase price. A very large number of the more recent munici- 
pal ordinances had already introduced this method of computa- 
tion. Tax reformers supported it on the ground that increments 
of value shown by real-estate transactions are due in the great 
majority of cases to the increase of pure land value, not to 

1 See table, p. 745. 



738 SELECTED READINGS IN PUBLIC FINANCE 

improvements. They pointed out, further, that the bill provided 
for the full, even generous, reckoning of the value of all per- 
manent improvements at their first cost. It is one of the peculiar 
omissions of German unearned-increment-tax legislation that 
depreciation in the value of buildings and other improvements 
is not taken into account. As a consequence, improvements made 
early in a long period of ownership may be allowed to go to rack 
and ruin, and thus greatly depreciate its selling price. This, of 
course, might greatly reduce or even wipe oiit a considerable 
increment in the value of the naked land, with the consequence 
that the seller would escape the tax in part or altogether. To 
allow the land-owner thus to profit by depreciation while at 
the same time he added the full original value of improvements 
to the purchase price of his property was energetically protested 
against by the friends of the new tax. After a bitter fight, how- 
ever, the land-owning interests succeeded in having the bill 
amended exactly as they wished, — the most important by far of 
a long series of concessions which they obtained from the Reichs- 
tag. Under the imperial law, therefore, cost of permanent im- 
provements is added to, or rather merged with, the purchase 
price in calculating the percentage of unearned increment. As a 
consequence such percentages will be greatly reduced, and with 
them the tax rates. By this one change the annual revenue from 
the new tax will be reduced by many millions of marks. 

To return to the three fundamental elements of unearned- 
increment taxation, namely, (a) the price paid for the property 
at the last purchase, (b) the cost of permanent improvements since 
made, and (c) the selling price. Additions allowed to the first 
two of these items, and deductions made from the third, will, of 
course, reduce the amount of unearned increment. This much 
is obvious, but unless it is constantly kept in mind the bearing of 
the numerous and intricate qualifications which must now be 
dealt with will be utterly lost. 

(a) The Last Price paid for the Property. In determining this 
item the price at which the property was purchased at its last 
transfer serves as a basis. Four per cent of this amount is added 
to cover the original costs of acquisition, including fees connected 
therewith. If it can be shown that the costs of acquiring the 
property were really higher, the larger amount will be added to 
the purchase price instead of the regular allowance of 4 per cent. 



THE INCREMENT TAX 739 

The new imperial tax is frankly retroactive — indeed it is 
retroactive in three distinct ways. First, it reaches back to 
December 31, 1910/ three months prior to the date the law went 
into effect, to cover sales of real estate during this period. This 
was done, of course, to get hold of fictitious real-estate transac- 
tions undertaken with the purpose of evasion. As it had been 
certain for a long time previous that the Empire intended to 
impose a tax of this character, and as many cities were consid- 
ering similar action, it is believed that sales of this sort running 
into millions of marks have occurred throughout the country. 

A second retroactive provision in the law is designed to get 
hold of other methods of evasion practised in the recent past and 
to prevent their employment in the future. All over Germany, 
whenever it has seemed likely that a city was about to enact an 
unearned-increment tax, large owners of real estate have hastened 
to create corporations and have then transferred their property 
to these corporations at prices sufficiently high to anticipate 
any increase in its value for years to come. By this ingenious 
device they hoped not only to avoid any immediate imposition 
of the tax, but also to escape it permanently, since they could 
thereafter virtually transfer ownership by selling corporate stock 
instead of selling the property outright. During the first five 
months of 1907, when Berlin was considering an unearned- 
increment-tax ordinance, one hundred and seventy-four limited- 
liability companies of this character were organized in that city. 
Rings were also formed in old-established real-estate corporations 
to buy up and then sell to the corporation desirable tracts which, 
it was thought, were thus brought under legal shelter from the 
impending tax. The imperial law reaches back six years, that is, 
to March 31, 1905, to cover such transactions. Instead of accepl- 
ing the price at which the land was turned into the corporation 
it provides for an independent appraisal of its real value. The 
unearned increment is to be calculated from the value so deter- 
mined, provided this value is 25 per cent less than the price paid 
by the corporation and the circumstances show that an evasion of 

1 In the first form of the bill this date was fixed at April i, 19 10, several days 
preceding the introduction of the bill into the Reichstag by the chancellor. 
Though the date was subsequently changed, there never was a time during the 
consideration of the bill in the Reichstag when evasion by this method appeared 
possible. 



740 SELECTED READINGS IN PUBLIC FINANCE 

part of the tax was intended. Another section of the law places 
stock transactions of real-estate corporations on the same basis 
with reference to the tax as direct transactions in real estate. 
By these provisions of the new law millions of marks of real- 
estate values which owners had thought safely concealed will 
be brought under contribution. 

Thirdly, and most important of its retroactive features, the 
new law reaches back for its basis in computing unearned incre- 
ment to the last sale of the property (with exceptions to be 
stated later) even if that sale occurred before the enactment of 
the present law. Moreover, it reaches much further back than 
most of the municipal ordinances already in existence. Cologne, 
for example, leaves all unearned increment which accrued prior 
to the passage of its ordinance entirely free; Magdeburg taxes 
increment accruing since April i, 1904; Duisburg, since January i, 
1900 ; Berlin and Breslau, since January i, 1895 ; and Hannover, 
since April i, 1885. Dortmund goes back to the last exchange, 
but if this occurred prior to January i, i860, a fixed tariff of 
land values is assumed instead. Hamburg goes back to the last 
sale without limit of time. 

The corresponding retroactive feature of the imperial law is 
not so severe as in some of the municipal ordinances, but still 
it is fairly stringent. In computing unearned increment the price 
paid at the last sale shall be taken as the cost basis or purchase 
price, if this sale occurred since January i, 1885. If it occurred 
prior to this date, an appraised valuation of the property as it 
stood on January i, 1885, is assumed in calculating unearned in- 
crement, unless the present seller can show that he or his pred- 
ecessors actually paid more for property, in which case the latter 
sum is taken as cost basis instead of the appraised valuation. 
The first of January, 1885, will remain basic in this way until 
1925, when the taxgatherer will be reaching back a full forty years 
in computing increment on properties which are changing hands 
for the first time since 1885. After 1925, when properties are sold 
that have not changed hands for more than forty years, an ap- 
praised valuation of the property as it stood forty years before 
the date of sale will be taken as the cost basis in computing un- 
earned increment, unless the seller can show that he or his pred- 
ecessors actually paid more than the appraised valuation, in 
which case the higher actual purchase price will be used as a basis. 



THE INCREMENT TAX 741 

Various criticisms have been made against this complicated 
arrangement. Even for the present it will not be easy to fix a 
satisfactory estimate of the values of many pieces of property as 
they stood in 1885. Between taxpayers and tax officials frequent 
differences of opinion are sure to occur and be taken to the courts. 
To reach back a full forty years in making such estimates will 
be an even more ticklish and contentious matter. After 1925, 
moreover, the tax officials will no longer be looking back to a 
single fixed date but to a series of dates forty years earlier than 
each transaction involving this application of the rule and 
advancing constantly as time goes on. From the point of view of 
tax technique, therefore, this provision of the law is likely to 
prove troublesome. 

Gratified as they were at the determination of the imperial 
authorities to make the law strongly retroactive, many tax re- 
formers nevertheless objected to the cumbrous form given this 
part of the measure. Some of them boldly proposed to fix the 
basic date permanently at January i, 1871. The Empire was 
founded about that time and special records of land values 
which could be referred to were made then. Moreover, even in the 
cities real-estate values had not then begun to make the mighty 
strides which have so increased rents, and in the end called 
forth the whole movement for the taxation of unearned incre- 
ment. Between 1871 and 1885, on the other hand, Germany's 
economic development was very rapid, there was much wild spec- 
ulation, and in the larger cities, at least, real-estate values ad- 
vanced considerably. By limiting the retroactive effect of the 
law to the year 1885 much of this increment will escape taxation. 
On the other hand, the real-estate interests in the Reichstag 
of course bitterly fought both the temporary limit to 1885 and 
the later permanent Hmit of forty years. While the dates were 
finally fixed as stated, important concessions, to be noted later, 
were secured by the land-owning interests in other parts of 
the law. 

(b) Cost of Permanent Improvements. It will be recalled that 
under the imperial law the cost of permanent improvements is 
to be added to, or rather merged in, the purchase price in com- 
puting unearned increment. What, then, are to be included under 
permanent improvements ? 

Theoretically expenditures for repairs and generally for the 



742 SELECTED READINGS IN PUBLIC FINANCE 

purpose of maintaining a property in its original condition are 
not so included. Depreciation, as we have seen, is not considered 
in any way. But sums spent since the last purchase of the 
property, or since the date at which its value was fixed under 
the terms of the law, for building, rebuilding, and for other 
special permanent improvements, form the basis of this item. 
Five per cent of the total amount so expended is added to cover 
the owner's trouble in directing the making of the improvements. 
If the owner is engaged in the building industry and has himself 
undertaken the making of the improvements, 15 instead of 5 per 
cent may be added to their actual cost on this score. 

Next to be added to this general item are the costs of street 
improvements, sewerage, and other similar public improvements 
to which the property owner contributed, plus 4 per cent annually 
thereon from the time such contributions were made until the 
property is sold, not, however, to exceed a period of fifteen 
years. 

Finally, an extremely complicated item is added, based both 
upon the original purchase price and the permanent improve- 
ments just considered. If taken together they show the property 
to have cost less than 100 marks an are ($964 per acre), or three 
times as much in the case of vineyard land, an amount equal 
to 2^ per cent per annum from the time of purchase in the case 
of purchase price, and from the time of making improvements 
in their case, shall be added. In the case of land which on the 
same basis represents a higher value per are, there shall be 
added on such excess, if unimproved, 2 per cent per annum ; 
if improved, i^ per cent. If the period of ownership has been 
less than five years and the land has remained unimproved, 
these additions are reduced one-half. 

This extremely awkward double-barrelled provision of the 
law is designed to accomplish various ends. In the first place it 
favors agricultural land wnth a high percentage, because increase 
in the value of such land in Germany is frequently due largely 
to the unremitting labor of peasant owners. Particularly is this 
true of vineyard lands ; hence the special clause bringing them 
under the 2j^ per cent rate up to a value of 300 marks per 
are ($2892 per acre). The lower additional rates allowed on the 
value of land and improvements above 100 marks per are are 
designed to let the tax burden fall more heavily on real estate 



THE INCREMENT TAX 743 

that has ceased to be used agriculturally and is either built upon 
or ripe for such uses. Last, this whole provision is designed 
to meet objections urged against the strong retroactive feature 
of the law. During a period ranging from twenty-six up to a 
maximum of forty years the monetary standard of value can de- 
cline very materially in purchasing power. Relative to a higher 
general range of prices a large apparent increase in land values 
may be real only in part or even totally deceptive. Without 
some safeguard, therefore, sellers of real property who for a -long 
time owned and occupied it ran the risk of being heavily taxed 
on an alleged increment which, considering a higher general 
range of prices, really did not exist. Hence the allowance of a 
small, steady annual rate of interest upon purchase price and 
improvement costs. 

While admitting the justice of this reasoning in general, tax 
reformers objected to the actual arrangement made in the law 
on the ground that it unduly favored the "millionaire peasant" 
type, familiar in the neighborhood of large German cities. It 
would be no less favorable, they complained, to that class of 
land speculators whose practice it is to acquire at little more than 
agricultural prices large tracts some distance out from the edge 
of cities and then to hold them for long periods until they are 
demanded at high prices for building purposes. So far as ac- 
count is taken in this paragraph of changes in the purchasing 
power of money it would also appear that while the state has 
sought to protect the property owner against the consequences 
of a depreciating standard of value and higher general prices, 
it has not in any way safeguarded itself against the consequences 
of an appreciating standard of value and lower general prices. 
During periods of the latter character unearned-increment taxes 
are not likely to be very productive. 

(c) The Selling Price. From the selling price — the third ele- 
ment of importance in computing unearned increment— are 
to be deducted the costs of the transaction incurred by the seller, 
including fees. Further, if the seller can show that he failed to 
realize an annual income of 3 per cent on the cost of the property 
plus improvements, the amount by which he fell short of this 
income for any period not exceeding fifteen consecutive years 
may be deducted from the selling price. The enormous advan- 
tage which this provision gives to the speculator who holds un- 



744 SELECTED READINGS IN PUBLIC FINANCE 

improved land for long periods is apparent. In connection with 
the additions allowed to the purchase price it enables him to 
escape taxation altogether for at least fifteen years unless his 
increment grows at a rate faster than 4 per cent or 5 per cent 
a year. 

Having thus defined the elements upon which the determina- 
tion of the unearned increment depends, the law next fixes the 
rates of taxation upon a progressive scale. The rates are based 
on the percentage of unearned increment to the purchase price 
of the property plus the cost of permanent improvements and 
the various additions allowed thereto. Beginning at an increase 
of value of 10 per cent or less, the tax rate is fixed at 10 per cent 
of the increment. The tax rate increases i per cent for each 
additional 20 per cent of increment until it reaches a rate of 19 
per cent on increments of from 170 to 190 per cent. Beyond 
this point the tax rate increases i per cent for each 10 per cent 
additional of increase of value until it reaches a maximum rate of 
30 per cent, which is imposed on all gains of 290 per cent and 
over. However, the taxes levied under these rates are subject 
to a deduction of i per cent of their amount for each completed 
year since the last sale of the property. If the last sale occurred 
prior to January i, 1900, this reduction shall be computed at the 
rate of 1^/2 per cent annually for the period up to January i, 
191 1. In order to present a clear picture of the tax-rate pro- 
visions of the law the table on the opposite page has been pre- 
pared. It shows the basic tax rate for the various percentages 
of unearned increment, and also the rates as they will be re- 
duced, under the provision just mentioned, after ten, twenty, and 
thirty years of possession. 

Comparing imperial rates with those fixed in municipal or- 
dinances, it should first be stated that the new law does not 
exempt low percentages of unearned-increment taxation. In most 
of the local enactments increases of value of less than 10 per cent 
were left free. If full value is admitted on all permanent im- 
provements, as is certainly the case in the imperial law, it is hard 
to see why such exemptions should be allowed. To this position 
the government adhered in spite of the opposition of the landed 
interests. 



THE INCREMENT TAX 



745 



TABLE SHOWING RATE OF TAX ACCORDING TO PERCENTAGE 

OF UNEARNED INCREMENT AND LENGTH OF POSSESSION UP 

TO THIRTY YEARS 1 



Percentage of Increase of 




Tax Rate 


Tax Rate 


Tax Rate 


Value to Cost Price Plus 




after Ten 


AFTER Twenty 


after Thirty 


Value of Permanent Improve- 




Years of 


Years of 


Years of 


ments, etc. 




Ownership 


Ownership 


Ownership 


io% and less 


10% 


9.00% 


8.00% 


7-00% 


Over 10% and up to 30%" 


II 


9.90 


8.80 


7-70 


" 30 " " 50 


12 


10.80 


9.60 


8.40 


u 30 " " 70 


.'3 


11.70 


10.40 


9.10 


" 70 " " 90 


14 


12.60 


11.20 


9.80 


" 90 '* " no 


15 


13-50 


12.00 


10.50 


u J 10 << » 130 


16 


14.40 


12.80 


11.20 


" 130 " " 150 


17 


15-30 


13.60 


11.90 


U 130 U U jjQ 


18 


16.20 


1440 


12.60 


" 170 " " 190 


19 


17.10 


15.20 


13-30 


" 190 " " 200 


20 


18.00 


16.00 


14.00 


" 200 " " 210 


21 


18.90 


16.80 


14.70 


" 210 " " 220 


22 


19.80 


17.60 


15-40 


« 220 " " 230 


23 


20.70 


18.40 


16.10 


" 230 " " 240 


24 


21.60 


19.20 


16.80 


" 240 " " 250 


25 


22.50 


20.00 


17.50 


" 250 " " 260 


26 


23.40 


20.80 


18.20 


" 260 " " 270 


27 


2,4.30 


21.60 


18.90 


" 270 >' " 280 


28 


25.20 


22.40 


19.60 


«' 280 " " 290 


29 


26.10 


23.20 


20.30. 


" 290 


30 


27.00 


24.00 


21.00 



As regards the scale of tax rates, ranging in the imperial lav^ 
from' 10 to 30 per cent, the follov^^ing list of the extremes in 
number of the more important local ordinances may be of 
interest: tax Rate 

Lowest Highest 

Hamburg i % i2>^^ 

Dortmund 3 15 

Essen 3 15 

Frankfurt-am-Main 2 25 

Berlin 5 20 

Breslau 6 25 

Cologne 10 25 

1 Adapted from Justizrat Hermann Kausen's Die Reichswertzuwachssteuer, 
p. 98, with changes made to conform to the final text of the act of February 14, 
1911. Actually the deduction of i per cent per annum is to be made from the 
gross amount of tax due under the basic rate, but the results would be exactly 
the same under a table such as the above. 



746 SELECTED READINGS IN PUBLIC FINANCE 

Under municipal tax ordinances, however, the high rate of 25 
per cent is, as a rule, imposed upon unearned increments of about 
150 per cent, whereas under the imperial law a 25 per cent rate is 
not reached until the increment amounts to 240 per cent. More- 
over, owing to the addition of the value of permanent improve- 
ments to the purchase price, the higher percentages of unearned 
increment will seldom be attained under the imperial law. Finally, 
experience in various cities has shown that the highest percen- 
tages of unearned increment emerge only on long-term property 
holdings. The reductions of the tax by^ i per cent per annum will 
save such large percentages of increment from the higher rates. 
Thus a case of unearned increment amounting to 290 per cent, 
accruing after thirty years' ownership, will pay at the rate of 
21 per cent instead of at the maximum rate of 30 per cent first 
fixed in the law. 

By way of summary of the various provisions of the new law 
regarding computation of unearned increment and tax rates, a 
typical example may be of service.^ Let us assume that on April 3, 
1905, a piece of unimproved property with an area of 1.63 ares 
was bought for 3939 marks. In 1906 a dwelling house was 
erected upon it, and the city made street improvements upon 
which the owner had to pay an assessment. The property 
was sold, February 5, 191 1, for 35,000 marks. Omitting minor 
details, the computation of unearned increment would be as 
follows: Add to the purchase price of 3939 marks (i) 4 per 
cent to cover the costs of purchase including fees, or 158 marks; 
(2) the cost of the dwelling erected in 1906, which was, say, 
20,000 marks ; (3) 5 per cent of the cost of this building to repay 
the owner for his work in directing the making of this improve- 
ment, or 1000 marks ; (4) the assessment of 1000 marks paid by 
the owner for street improvements made by the city in the same 
year ; (5) 4 per cent thereon for the four full years elapsing be- 
tween 1906 and the date of sale, or 160 marks ; (6) the allowance 
of 2^ per cent on the value of the property up to 100 marks per 
are for five full years, amounting to 20 marks ; (7) the allowance 
of 2 per cent on the value in excess of this amount per are as long 
as the property remained unimproved, or one year, which makes ^ 

1 Adapted from Boldt, p. 1 56. 

2 From the purchase price, 3939 marks, increased by costs of acquisition figured 
at 4 per cent, or 158 marks, is subtracted 163 marks, the value of 1.63 ares at 100 



THE INCREMENT TAX 747 

79 marks; (8) the allowance of i>^ per cent on this excess plus 
the expenditures for the dwellingf (20,000 marks) and directing 
its erection (1000 marks), from the time this improvement was 
made until date of sale, or four years, making 1496 marks.^ The 
sum of these various items, or 27,852 marks, is the total cost of 
the property as determined under the imperial law. Next sub- 
tract from the selling price of 35,000 marks the amount by which 
the owner fell short of a 3 per cent income on his investment 
during the year the property remained unimproved, or 123 
marks,^ and the result, 34,877 marks, is the selling price of the 
property as determined under the imperial law. Legal selling 
price (34,877 marks) minus legal cost (27,852 marks) gives a 
gross unearned increment of 7025 marks. The ratio of this 
amount to legal cost (7025 to 27,852 marks) shows the percen- 
tage of increment to be 25.2; and, accordingly, the tax rate is 
II per cent. Eleven per cent of the 7025 marks, figured as the 
gross amount of the unearned increment, is T]2.'j^ marks, but 
this must be reduced by 38.65 marks, which is i per cent of the 
tax for the term of five years during which the property was in 
possession of the present seller. With this final deduction, there- 
fore, the amount of tax actually to be collected on the transaction 
is 734.10 marks. 

Next in interest to the provisions regarding the computation 
of unearned increment and tax rates was the question of the 
division of the income from the tax among the Empire, the states, 
and the cities or other local government bodies. It will be recalled 
that the municipalities of Germany began the development of this 
form of taxation several years before the Empire entered the 
field. Strong pressure put upon them from above forced them 
to this solution of their financial difficulties.^ Naturally, there- 
marks per are, leaving 3934 marks on which this allowance of 2 per cent for one 
year is made. 

1 To the 3934 marks figured in the preceding note is added the cost of build- 
ing the dwelling plus the 5 per cent allowed the landlord for directing the making 
of this improvement, and the sum, or 24,934 marks, is the basis for this allowance 
at the rate of i| per cent for four years. 

2 In this case, also, to the actual purchase price of 3939 marks is added 4 per 
cent, or 158 marks, to cover the costs of acquisition including fees. 

3 See article by the present writer on " Berlin's Tax Problem " in the Politi- 
cal Scie^ice Qiiarterfyy Vol. XX, p. 666 (Dec, 1905) ; also Yale Review, Vol. XVI, 
p. 242 (Nov., 1907). 



748 SELECTED READINGS ^IN PUBLIC FINANCE 

fore, they protested on every possible ground against any in- 
vasion of what they had come to look upon as their own baili- 
wick/ Legally and logically, however, the position of the cities 
was open to attack. Against the unquestioned constitutional 
right of the Empire to enter upon taxation of this character the 
cities could urge only their moral right based upon prescription. 
As a matter of logic it was impossible for the cities to deny the 
right of the Empire, and, for that matter, the right of the state 
and other local government bodies as well, to participate in the 
revenue derived from the taxation of unearned increment. The 
use of the term "unearned" in this connection is subject to quali- 
fication. Primarily, of course, it means unearned by the land- 
lord. We have already seen what pains were taken in the law 
to assure owners the benefit of every possible contribution made 
by them in the form either of investments or of labor. If any- 
thing remained after these deductions were fully and fairly made 
it was clearly not due to the exertions of the landlord, and, 
hence, so far as he was concerned, deserved to be called unearned. 
Now the cities declared their intention of taking by taxation a 
portion of such residual amounts on the ground that they were 
due to a considerable extent to the beneficent operations of munic- 
ipal government. In other words, part of the increment unearned 
by the landlord was clearly earned by the city. On exactly the 
same grounds, however, it cannot be denied that other parts of the 
increment unearned by the landlord were due to the beneficent 
operations of imperial, state, and local governments other than 
municipal. In the case of Berlin and the capital cities of the 
various states, of military and naval stations, of cities in which 
great public institutions with their administrative forces were 
located, the contributions of imperial and state governments to 
local land values were direct and undeniably very great. And 
even in other places the work of imperial and state governments 
in maintaining peace and order, furthering commerce abroad 
and at home, fostering manufacturing, agriculture, and other 
industries, and so on, must have contributed materially to the 
growth of land values. 

1 In addition to the general references cited in the note, p. 734, and especially 
the minutes of the Hannoverian Stadtetag, consult the Mitteilungen d. Zentral- 
stelle d. deutschen Stadtetags, Band ii, Nos. 19-20, p. 489. 



THE INCREMENT TAX 749 

Nearly all the representatives of city interests conceded the 
general validity of this argument. Unfortunately it furnishes 
no quantitative basis for a just and universally applicable division 
of the revenue arising from a general unearned-increment tax. 

Indeed it is clear that the division of the increment unearned 
by the landlord into quotas assumed to be earned by imperial, 
state, and local governments respectively cannot justly be ac- 
complished upon the same basis for all localities. If, neverthe- 
less, some uniform rule had to be adopted, the advocates of city 
interests were quite certain that it should apportion by far the 
larger share of the revenue to the municipal governments. City 
governments, they held, were closer to the local property owner, 
and the services of such governments in providing or supervising 
pubHc utilities, safeguarding public health, furnishing facilities 
for public amusements, and so on, contributed in the main much 
more directly and materially to the growth of land values than the 
services of state or imperial governments. A division of the rev- 
enue, giving two thirds to the cities and one third to the Empire, 
was accepted as fair by some of the advocates of city interests.^ 

Apart from the vital point as to their quota under the imperial 
law the interest of the cities was identical with that of the 
Empire, and opposed to that of the landowning class. In 
other words, as partners in a common tax undertaking, both 
city and Empire desired as strong and productive a measure 
as possible. One other point, however, made by the advo- 
cates of municipal interests against the proposal of an im- 
perial tax is of sufficient importance to deserve notice, — namely, 
that owing to the wide variations of conditions in different 
localities, and particularly as between city and country, no 
unearned-increment -tax legislation applicable uniformly over the 
Empire could be just. In proof of this assertion attention was 
called to the wide and numerous differences shown by a com- 
parison between the various local ordinances enacted prior to 
191 1. It is impossible to deny a certain validity to this argu- 
ment, and future amendments to the imperial law may have to 
take it into account. The differences discoverable in the earlier 

1 See p. 150 of Stadtrat Boldt's earlier work on Die Wertzuwachssteuer, 
Dortmund, 1909. This suggestion assumed that the cities were to do the work 
of assessing and collecting the tax, and thus left the states out of account. 



750 SELECTED READINGS IN PUBLIC FINANCE 

ordinances, however, are said to be due largely to the varying 
degrees of strength and tenacity with which the landlord interest 
fought them in municipal councils. 

In favor of an imperial unearned-increment law various argu- 
ments besides the general points already noted were made. One 
was that local property owners were often strong enough to 
cause the rejection or emasculation of unearned-increment-tax 
ordinances in city councils. Imperial legislation and administra- 
tion, it was hoped, would be more free from this influence. At 
one stroke unearned-increment taxation would be introduced by 
an act of the Reichstag over the whole of the German Empire. 
While the latter point was well taken and of unquestioned 
weight, we have already seen that the landlord interest proved 
itself far from lacking in influence in the Imperial Diet. Finally 
the advocates of legislation by the Empire urged that the tax 
rates could readily be made high enough to insure those cities 
which already had ordinances of their own, incomes as large 
as they were already enjoying from this source. 

Let us turn from the arguments on this point to actual ad- 
justment of imperial with local interests made by the law of Feb- 
ruary 14, 191 1. The lion's share of the income from the new tax, 
50 per cent altogether, goes to the Empire ; 10 per cent of the 
amounts collected in their respective territorities goes to the 
state governments as reimbursement for the costs of adminis- 
tering the law ; and the remaining 40 per cent is left to the mu- 
nicipalities or other local government corporations. Further, the 
state governments are given power to deal on their own account 
with this last 40 per cent. The municipalities may, therefore, 
find themselves forced to stand for further reductions imposed 
upon them by the various state diets for the benefit of the 
counties (Kreise), provinces, or of the state itself. Some conso- 
lation may be derived by the cities from the fact that, with the 
consent of the supervisory authorities of the state, they may 
add local levies on their own account to the imperial tax rates, 
but these supplements (Zuschlage) will not be allowed to exceed 
in revenue-producing power the amount due the city under the 
imperial law, i.e., 40 per cent of the total amount collected. 
Further, the imperial and local rates taken together may in no 
case take more than 30 per cent of the unearned increment. 



THE INCREMENT TAX ' 75 1 

With these limitations additional local rates may be variously 
fixed according to the different kinds of property involved and 
the length of the period during which it has been in the posses- 
sion of the seller. Some room for local adjustment is thus 
allowed even under the terms of the imperial law. Indeed one 
of the arguments in defence of the low scale of tax rates pro- 
vided by the imperial law was that the rates must be so fixed in 
order that cities desiring it would have room to add Zuschldge 
of considerable size on their own account. It is believed, how- 
ever, that real-estate interests will make it extremely hard for 
city councils to proceed far in this direction. 

One further concession is made to those communities which, 
prior to April i, 1909, passed an unearned-increment-tax ordi- 
nance to take effect before January i, 191 1, or in which prior to 
the latter date an ordinance had gone into operation with retro- 
active effect back to April i, 1909... In case such communities 
can show that their average yearly income under their ordinances 
was in excess of the portion allotted to them under the imperial 
law, the difference is to be paid them out of the share of the 
Empire until April i, 191 5. Or instead of this a community, 
with the consent of the imperial chancellor, may retain its exist- 
ing ordinance for the same period, paying over to the Empire, 
however, all income in excess of the average which it received 
from its own tax prior to April i, 191 1. It is left to the imperial 
federal council (Bundesrat) , by the way, to determine what this 
average has been in given cases. So far no general method of 
computing such averages has been promulgated. Owing to the 
great diversity of municipal ordinances on the subject it will 
be a matter of great difficulty to do so, and any solution is cer- 
tain to cause friction between city and imperial officials. For 
the time being, therefore, the Bundesrat has decided to avoid 
general rules and to deal only with individual cases as they 
come up. 

By these transition provisions of the new law those cities 
which anticipated the Empire in unearned-increment taxation are 
guaranteed against any diminution of their income from this 
source during a period of four years. After 191 5, however, all 
local legislation will be permanently superseded by the imperial 
law administered uniformly throughout the whole country. So 



752 ' SELECTED READINGS IN PUBLIC FINANCE 

far as the continuation of local ordinances is concerned a recent 
announcement by the imperial chancellor is of great interest/ 
For the present he has determined to grant permission to retain 
existing ordinances for periods of one year only. This will 
enable municipalities having their own ordinances to study results 
obtained under the imperial law in other cities. If the latter 
prove satisfactory, the uniformity contemplated by the law may 
be attained, with the full consent of the interested cities, earlier 
than 191 5. 

From an American point of view those aspects of the new 
imperial law which we have just been considering are interesting. 
They show the federal government of Germany reaching down 
to abrogate or rearrang-e in thoroughgoing fashion a detailed 
part of the tax systems of many municipalities and local govern- 
ments scattered through its separate states. Under our consti- 
tutional system such interference by Washington in affairs of 
local taxation is, of course, quite out of the question. 

In accordance with the usual German practice the actual ad- 
ministration of the new unearned-increment tax is turned over 
to the various state governments, subject, however, to the super- 
vision of the imperial plenipotentiaries for customs and taxes. 
Ample provision is made in the law for the hearing and decision 
of all complaints made by taxpayers. Fines are provided for 
various offences. In the opinion of the German Municipal Con- 
ference the administrative provisions of the law are so unduly 
complicated that they will greatly increase the amount of work 
and the costs necessary to collect the tax, and will lead to much 
litigation.^ 

Experience has shown that no prophecies are more apt to be 
misleading than those regarding the income to be yielded by 
an unearned-increment tax. All the factors affecting the real- 
estate market, including the perturbations and evasions caused 
by the impending tax itself, and all the complicated legal para- 
phernalia for the computation of unearned increment, play a part 

1 Mitteilungen d. Zentralstelle d. deutschen Stadtetags, 10. Juni, 191 1, p. 137. 

2 Antrag d. Vorstandes d. deutschen Stadtetags betr. Reichszuwachssteuer 
V. I. Nov., 1910. Mitteilungen d. Zentralstelle d. deutschen Stadtetags v. 12. 
Dez., 1910, p. 489. 



THE INCREMExNT TAX 753 

in the final result. Over a very wide field, such as that covered by 
the new imperial law, however, fluctuations in the many local 
real-estate markets will perhaps tend to compensate each other. 
As to the probable income which the new tax may be expected 
to yield, all cautious prophets are silent. Only one line of specu- 
lation may be suggested regarding this matter. In 1909 a stamp 
tax was placed in the imperial budget with the understanding 
that the unearned-increment -tax law should be worked out later 
and substituted for it. Now to enable the government to dispense 
with this stamp tax an annual income of at least 20,000,000 marks 
from the unearned-increment tax would be necessary. And as 
the Empire was to receive only half of the income from such a 
tax, a total revenue of 40,000,000 marks ($9,528,400.00) was to 
this extent indicated. Whether or not the government's original 
bill would have produced so much is highly problematical. But 
it is absolutely certain that the amendments made in the Reichs- 
tag enormously reduced the revenue-producing power of the 
act. That the government shares this view is proved by the later 
action of the Reichstag, which, upon the urgent representations 
of the imperial secretary of the treasury, postponed the substitu- 
tion of the unearned increment for the stamp tax from 191 1 
to 1914. 

In its main outlines, therefore, the new imperial law may be 
described as fairly strong in its retroactive features and weak 
elsewhere. Financially its present importance is very slight. In 
its extreme complexity the law is a true product of the German 
intellect. As experience is obtained in its administration and 
as decisions are handed down by the courts regarding its inter- 
pretation, the difficulties arising from this course may be greatly 
reduced. Still it remains a very vital question, particularly from 
the point of view of more democratic, countries which may wish 
to follow Germany's example, as to how far the complexity of 
unearned-increment taxation is inherent in the nature of the 
subject itself. As the law stands it is not satisfactory to the 
Empire from the point of vieW of productivity, nor to the cities 
as regards their share of the income, nor to the real-estate inter- 
ests which, of course, are fundamentally opposed to all taxation 
of this sort. Between the three it is certain to be considerably 
amended soon after its effects become manifest. German land- 



754 SELECTED READINGS IN PUBLIC FINANCE 

tax reformers are inclined to lament that the new law has "no 
teeth in it." A fairer statement would be that it has simply cut 
its milk teeth and may be expected to develop mature molars and 
incisors later. Taking all things into consideration, however, the 
new imperial law is one of the largest and most significant 
practical applications of the single-tax idea that has ever been 
attempted. 



CHAPTER XX 

THE CUSTOMS REVENUE OF THE UNITED STATES 

80. The Financial Aspects of the Customs Revenue. — Dr. 
R. F. Hoxie discusses the financial aspects of our customs 
duties, as follows : ^ 

A system of duties on imports for the support of the national 
government was established by the first Congressional revenue 
act under the Constitution of 1789. It seems to have been the 
popular desire, at that time, that customs duties alone should 
supply the federal revenue. But distrust, notably on the part 
of Hamilton, of the ability of this source to supply fully the 
fiscal needs of the government, led to the establishment also of 
a system of internal revenue duties. These two systems were 
on trial together for a decade. The result was definite. Though 
more than S8 per cent of the tax income was derived from 
import duties, that source continued to be regarded with 
favor by the people, while the internal revenue duties were 
steadily opposed. Nor was the opposition merely passive. In 
the case of the Whiskey Rebellion, it developed into armed 
resistance to federal authority, and, rapidly increasing in force, 
assumed at length the proportions of a national political issue. 
As such it accomplished a tax revolution. In the campaign of 
1 80 1 the maintenance of internal duties was one of the objec- 
tions urged against Federalist rule. The triumph of the Repub- 
licans was immediately followed, as a political necessity, by the 
abolition of the internal taxes. This verdict of the people was 
final ; it definitively established customs duties alone as thp 
American system of national taxation. From that time until 

1 The Adequacy of the Customs Revenue, Journal of Political Economy, Vol. 
Ill, pp. 43-64. Reprinted with consent of the author and the Journal of Political 
Economy. 

755 



756 SELECTED READINGS IN PUBLIC FINANCE 

the end of the Civil War, resort was had to other forms of taxa- 
tion *' only on occasions of special exigency," marking the break- 
down of the customs tax system. 

Since the Civil War, indeed, the internal revenue duties 
imposed, during that emergency, to supplement the income 
from import duties have been in part retained, but with no inten- 
tion of displacing the traditional American system. On the 
contrary that system has been constantly strengthened. The 
internal duties may be regarded as taxes of convenience, re- 
tained simply to bolster up the regular tax system. The fairly 
steady stream of income flowing from them reduces, to that 
extent, the amount of revenue to be derived from import duties. 
But in no way does it remove from the customs revenue system 
the responsibility for adequacy. Customs duties then, may, 
with propriety, be subjected to the test of adequacy, as the 
American system of taxation, from the tax revolution of 1802 
to the present time. 

It now remains, before entering upon the historical dis- 
cussion, merely to indicate briefly the data necessary for the 
examination and the method of procedure. The most essential 
data for the inductive test about to be attempted are the figures 
of government expenditure, and of the income from customs 
duties in the United States, during the whole period under dis- 
cussion. These figures have been collected and will be found 
in tables in the Appendix. Further, because of defects in the 
sources from which it was necessary to obtain these data, and 
also, because of the intimate relation existing between customs 
revenues and imports, the amounts of total and of dutiable im- 
ports have been added to the tables. For convenience in use all 
these figures have been incorporated into two charts (see below). 
In the first of these charts is represented the actual values of 
total imports and customs revenues from 1790 to 1893 inclusive, 
and the value of dutiable imports from 1821 to 1893. In the 
second chart is represented the per cent of customs revenues to 
net ordinary governmental expenditures from 1790 to 1893. It 
will be the aim of the following discussion to interpret these 
charts by the aid of the events of contemporaneous history ; and 
the examination will be separated into several convenient parts, 
corresponding to the periods into which our history naturally 



CUSTOMS REVENUE OF THE UNITED STATES 757 

divides itself when viewed with reference to poUtical and indus- 
trial conditions. 

I. The years from the adoption of the Constitution of 1789 
to the outbreak of the War of 18 12 form a distinct period in 
the national and industrial development of the United States. 
The conditions were those of a young but vigorous agricultural 
and commercial nation subjected to strong foreign influence. 
The current national expenditure, though varying from year to 
year, was never excessive. Taxation was moderate, as proved 
by the general prosperity of the people and the rapid payment 
of the public debt. Under these conditions, the income from 
an efficient system of taxation, ought not to have violated to 
any great extent the principles of fiscal adequacy. A glance at 
Chart II, however, shows that throughout the period, and espe- 
cially in the last decade when customs duties were the only 
source of public revenues, the income did seriously violate these 
principles. While the revenue was in the main much more than 
sufficient to supply current fiscal demands, its great and rapid 
fluctuations, when compared with government expenditures, 
rendered it an extremely variable basis upon which to place 
public finances. Chart I clearly shows the reason for this in- 
stability. Imports, upon the value of which customs revenues 
were dependent, reflected, not the demands of our government, 
but every marked change in European diplomacy and war. 

Previous to the year 1802 the general state of European war 
had proved, in the main, advantageous to our commerce. Still 
the instability of customs revenues had been remarkable. Start- 
ing with a production in 1 791, 41.5 per cent above the govern- 
ment expenditure, the income from this source fell the next 
year to more than 58 per cent below public expenditure, rose 
again in 1793 to 110.3 P^r cent, fell immediately to 76.2 per 
cent, and then rose with fluctuations violent but less extreme 
till, in 1802 when the internal duties were discarded, it stood at 
155.9 per cent or more than three millions above the demand 
for current expenditure. The stability of public income was not 
increased by basing the national revenue system upon customs 
duties alone. The temporary cessation of hostilities in Europe 
in 1802 was accompanied by an immediate fall in the value of 
imports to ^40,558,000 as compared with ;^64, 720,000 in the 



758 SELECTED READINGS IN PUBLIC FINANCE 

previous year. The renewal of European wars again produced 
a gradual increase of American commerce, until in 1807 the 
value of imports had risen higher than ever before, exceeding 
;^78,ooo,ooo, while the revenue from customs duties was 89.6 per 
cent in excess of ordinary public expenditures. This surplus 
revenue, though in general indicating an unsound condition of 
the finances, did not prove burdensome to the treasury at the 
time, as an outlet for it was provided in the payment of the 
revolutionary war debt. The productiveness of taxation, there- 
fore, gave rise to high expectations and led so conservative a 
financier as Mr. Gallatin to believe that the customs revenue 
system would prove an adequate basis in case of foreign war. 
In 1806 he raises the question whether some mode may not be 
devised to provide for the final and complete payment in a 
short period of the public debt. The next year he estimates 
that the surplus in the treasury at the end of 1808 will amount 
to ^8,000,000, and that " an annual unappropriated surplus of at 
least ;^3,ooo,ooo may henceforth be relied upon with great con- 
fidence," But in this he was quite misled. Already that series 
of events, foreign in origin, had commenced which, though not 
depriving the American people of the means for satisfying 
government needs, were destined speedily to all but annihilate 
American commerce and thus cut off from the government its 
source of supply. The Berlin and Milan decrees of Napoleon, 
followed by the British orders in council, the expiration of Jay's 
treaty, and Jefferson's unfortunate imposition of the embargo 
brought about an immediate falling off in the volume of Ameri- 
can imports from ^78,856,000 in 1807 to ;^43,992,ooo in 1808 
and ^38,602,000 in 1809. The suspension of commerce meant 
the impairment of the revenue from customs duties. From 
1807 to 1809 the income from this source fell from ;^ 15,845,000, 
or 89.6 per cent more than was called for by current govern- 
ment needs, to ^7,257,000, a little more than 70 per cent of the 
government expenditures. The surplus for which Mr. Gallatin 
had been seeking employment was immediately swept away. In 
his report for 1808 the secretary's tone has entirely changed. 
" If the embargo and the suspension of commerce shall be con- 
tinued," he writes, " the revenue arising from commerce will in 
a short time entirely disappear. In case of war some part of 



CUSTOMS REVENUE OF THE UNITED STATES 759 

that revenue will remain ; but it will be absorbed by the in- 
crease of public expenditures. In either case, new resources to 
an unascertained amount must be resorted to." From this time 
to the end of the period in 1812 a series of rapid changes in the 
aspect of foreign affairs was faithfully reflected by fluctuations 
in the source of revenue. In 1808 England opened the ports 
of Spain and Portugal, and early in 1809 the embargo was 
suspended — importations responded in 18 10 by a rise from 
$38,602,000 to ;^6 1, 008,000. Napoleon, in 18 10, seized the 
American shipping in European ports, and the embargo was 
reenforced in the same year as regarded England — importa- 
tions fell in 181 1 to $37,377,000. Shortly after, Russia and 
Sweden opened their ports to American shipping in defiance 
of the Berlin and Milan decrees — imports rose rapidly to 
$68,534,000. 

A more comprehensive idea of this period may perhaps be 
obtained from an examination of the charts and tables than 
from the previous discussion. But such an examination serves 
only to strengthen the evidence revealing the inadequacy of the 
customs revenue system. From Chart II it will be seen that in 
the twenty-one years here included, though the revenue was on 
the whole much above government expenditure, yet it fell below 
that amount no less than nine times — a most remarkable exhi- 
bition of instability. Further, after 1802, when customs became 
the sole source of revenue, the public income, as shown by the 
tables, ranged from 30 per cent below to 89 per cent above 
expenditures ; yet in one year only did it approach nearer than 
27 per cent above or below that amount. In a word, the reve- 
nue seemed utterly uncontrollable either by reduction when it 
was too large or by increase when it was too small. Taken as a 
whole, then, the examination of this period indicates clearly that 
when the commerce of a nation is exposed to serious disturb- 
ances, on account of foreign influence, great instability in the 
revenue derived from this source is the inevitable consequence, 
and disordered finances the result. Under such circumstances 
it must be extremely dangerous to base the public finances upon 
customs duties alone„ 

2. With little change in industrial conditions, the United 
States passed from the period of foreign influence into a period 



76o SELECTED READINGS IN PUBLIC FINANCE 

of foreign war. Peace was formally abrogated at about the 
close of the fiscal year 1812, and normal conditions were not 
restored until near the end of the fiscal year 18 16. Roughly 
speaking, these dates mark the limits of the war period. Were 
it reasonable, during this time, to judge of the adequacy of the 
customs revenue system by means of a simple comparison be- 
tween the income from import duties and the necessary expend- 
itures of the government, no elaborate discussion would be 
necessary in order to reach a very definite conclusion. The 
great depression of the broken line on Chart II clearly and 
conclusively indicates the utter failure of the customs revenue 
to support the government adequately. It must be borne in 
mind, however, that this period was a crisis in the life of the 
nation when it may be doubted whether the current national in- 
come was sufficient to satisfy both the total wants of the gov- 
ernment and the imperative individual needs of the people. No 
tax system in such a case could be required to furnish the whole 
of the necessary government income. 

This fact was recognized at the time, and influenced the finan- 
cial plan of the war. Mr. Gallatin, secretary of the treasury, 
in outlining this plan, calculated that taxation might be safely 
depended upon to defray the ordinary expenses of the peace 
establishment, together with the interest on the pubHc debt, and 
that, with this tax income as a basis, the extraordinary expenses 
might be defrayed by loans, without injury to the credit of the 
nation. In pursuit of this policy, he proposed that the whole of 
the tax income should, as heretofore, be drawn from customs 
duties. These calculations seem to have been reasonable. 
Imports, though varying, had risen in 18 12 to more than 
^68,000,000 — an ample source from which to obtain the peace 
revenue — while there was an abundance of loanable capital in 
the country. 1 The war policy, then, was rational. Further, it 
was conditioned on the character of the revenue from customs 
duties. Unless, therefore, it can be shown that the nation was 
exhausted or the people disaffected, the adequacy of the customs 

1 In 1808 Mr. Gallatin said : "The embargo has brought in and kept in the United 
States almost all the floating capital of the nation, . . . at ro former time has there 
been so much redundant and unemployed capital in the country." — Report of the Secre- 
tary of the Treasury, 1808, Finance Reports, Vol. I, p. 377, 



CUSTOMS REVENUE OF THE UNITED STATES 761 

revenue system during this period is to be judged by the success 
of the war poHcy. 

From the outset, the financial operations of the war were in- 
adequately supported by the tax revenue. In accordance with 
his plan Mr. Gallatin had recommended that customs be immedi- 
ately increased 100 per cent. June 30, 18 12, therefore, duties 
were doubled, but the anticipated increase of revenue was not 
forthcoming. The income was, indeed, larger for the calendar 
year 18 13 than in the years preceding, owin^ to the great amount 
of imports in 18 12, but it fell immediately thereafter far below 
the peace level, and during the continuance of the war remained 
utterly insufficient and wholly inflexible. Nor could the result 
have been otherwise. For the amount of imports progressively 
fell as public expenditure rose, until, in 18 15, the total value of 
imported merchandise was less than the ordinary income from 
customs duties, and not one third of the amount of public expend- 
itures. The credit of the government declined almost from the 
beginning. Of the six government loans only the first was 
placed at par, though 6 per cent was offered and various tempt- 
ing inducements held out to capitalists. The depreciation of the 
public credit is shown in the discount of 35 per cent at which 
6 per cent stock was sold in 18 14. The successive issues of 
treasury notes which were resorted to after the fiscal year 181 3 
also suffered severe depreciation. By 181 5, so low had the 
credit of the nation fallen, that payments in state bank paper, 
though the banks had suspended specie payment, were univer- 
sally preferred to payments in the paper of the government. 

The failure of the customs revenue system to produce an 
abundant revenue, and this consequent deplorable state of the 
public finances, were not due to national exhaustion. The re- 
sources of the country were ample, but they could not be 
reached through the channel of customs duties. Nor, in spite 
of the opposition of New England, can the fall of public credit 
be ascribed to the unwillingness of the people to bear further 
taxation. Secretary Campbell distinctly denied both supposi- 
tions, and his denial is borne out by the fact that the internal 
duties, reluctantly placed when it became evident that the cus- 
toms revenue system had broken down, produced a fairly abun- 
dant income up to the end of the period. No valid excuse, then, 



762 SELECTED READINGS IN PUBLIC FINANCE 

for the insufficiency of the pubHc revenue being found in the 
want of pubHc wealth or the popular support of the government, 
it must follow that the failure of the financial plan of the war, 
conditioned as it was upon customs duties, is evidence of the 
inadequacy of that system of taxation to serve as the source of 
national income. 

The evidence against the customs revenue system furnished 
by this period is not, moreover, all brought out in the discussion 
of the failure of the war policy. The instability of the revenue 
from import duties was, further, most strikingly illustrated by 
the events following the close of the war. As soon as the arti- 
ficial restraints on foreign intercourse were removed, the volume 
of imports rose to a great height. In 1815 the value of im- 
ported merchandise stood at only ^10,645,000; the next year it 
was $129,964,000, more than a twelvefold advance. The 
100 per cent increase in the rate of customs duties, now that 
the imperative need for it was past, now that it was too late to 
save the credit of the nation, became enormously productive. 
For the year 18 16 the customs revenue was five times greater 
than for 1815, while in 1816 and 1817, together, $63,589,000 
flowed into the treasury from import duties, as against $13,280,000 
in the two years preceding. This remarkable increase of reve- 
nue, coming so near the close of the war and yet causing no 
stay in the progress of the nation, is indicative of the tax income 
that should have been realized while the war was actually in 
progress. Had the $63,000,000 of revenue now received from 
customs duties been distributed over the three or four preceding 
years there is every reason to believe that the war might have 
been more vigorously prosecuted, the credit of the government 
sustained, and much less public debt incurred. 

3. Oppressive foreign influence in the United States dis- 
appeared with the War of 1812. A new era was then entered 
upon, characterized chiefly by vigorous and healthful national 
growth, the payment of the public indebtedness, and the 
rise of manufactures. The limits of this period, as distinctly 
shown in Chart I, are 1816 to 1835. For the purposes of 
this paper the leading events may be very briefly summarized. 

Though foreign trade declined rapidly after 18 16, customs 
revenues were in the main more than sufficient to. meet govern- 



CUSTOMS REVENUE OF THE UNITED STATES 763 

ment expenditures. The evils of redundant income were avoided 
by the rapid payment of the public debt. Unfavorable indus- 
trial conditions, however, in this manufacturing era, as in the 
commercial and war periods preceding, rendered the revenue 
extremely uncertain. Especially in the crises of 18 19 and 1824 
the income, as shown in Chart I, fluctuated abruptly and widely 
about government needs. During the earlier crisis these fluctua- 
tions were almost as marked as those of the foreign war period. 
Chart I shows the cause. Imports which had risen in 18 18 to 
^102,323,000 fell successively, through 1819, 1820, and 1821, to 
^^67,959,000, ^56,441,000, and $43,696,000 respectively. Cus- 
toms revenues consequently decreased, falling from $20,283,000, 
in 1819, to $15,005,000, in 1820, and $13,004,000 in 1821. Nor 
did the income fully recover until after the crisis of 1824. The 
serious effect upon the treasury of this unexpected decrease of 
revenue is shown by the following extract from the report of the 
secretary for 18 19: " It is not probable that any modification 
of the existing tariff can supersede the necessity of resorting 
to internal taxation if the expenditure is not diminished. . . . 
Whether the revenue be augmented or expenditure be dimin- 
ished a loan to some extent will be necessary." Yet the revenue 
was ordinarily redundant and two years before had been 31.4 
per cent greater than the government expenditures, and further, 
this was in a time of peace and average prosperity, when, if ever, 
the income should have proved adequate. However, from the 
crisis of 1824 to the end of this period in 1835 little criticism can 
be made of the revenue system. Imports rose rapidly, and the 
income from customs duties continued to be for the most part 
far above the current government expenditures. Though this 
was in direct violation of the rule of sufficiency it furnished a 
welcome means of debt payment, and the period closed with 
confidence in this source of revenue unshaken. 

4. Between 1835 and 1843 a brief period of unhealthful specu- 
lative expansion, and the inevitably painful return to normal 
conditions, succeeded the vigorous growth of the preceding 
years. The national debt was practically liquidated at the close 
of the year 1835, and the speculative spirit which developed was 
undoubtedly due in great part to surplus revenue no longer to be 
disposed of by debt payment. This surplus, accumulated mainly 



764 SELECTED READINGS IN PUBLIC FINANCE 

through excessive sales of public lands, added to the ordinary 
customs tax income. 

An unappropriated surplus is always a greater financial evil 
than a moderate deficit, since it so far unnecessarily reduces the 
income of the people and leads to false estimates of the taxpay- 
ing capacity of the nation. At this time, therefore, the income 
from a legitimate system of taxation, through its elasticity, 
should have declined so that the total government income might 
meet exactly the demands of ordinary public expenditures. It 
was not so with the income from the customs tax system. 
Though the secretary of the treasury recognized the danger 
and repeatedly endeavored to bring about a reduction in the 
tax income, the revenue from customs during the years of specu- 
lation rapidly increased (see Chart I), rising from $16,214,000, 
in 1834, to $19,391,000, in 1835, and $23,409,000, in 1836. 
The ridiculous spectacle was presented of a sovereign people 
taxing themselves far beyond the needs of the government and 
yet wholly unable to obtain relief, while a growing surplus was 
becoming more and more a source of anxiety. At last, in June, 
1836, the reduction of the revenue being out of question, Con- 
gress passed an act for the disposal of the surplus. It ordered 
the distribution of $28,000,000 among the states in the form of 
quarterly payments beginning January i, 1837. Before the 
last deposit was made the aspect of affairs was entirely changed. 
Over-speculation had precipitated the crisis of 1837. The sale 
of public lands ceased. Government income at once fell from 
forty-eight to nineteen millions. The same secretary, who, a year 
before, had urged a reduction of income now spoke dolefully of 
a prospective deficit at the beginning of 1838 of over five mil- 
lions. The need now was for an immediate increase of the tax 
revenue. But the income from the customs tax system instead 
of rising to meet this need dropped from $23,409,000 to 
$11,169,000. A glance at Chart II will best indicate the state 
of affairs. Though two years before, when the treasury was 
overflowing with income from an incidental source, import 
duties had furnished 10.3 per cent more than the total needs of 
the government, they now brought in less than 30 per cent of 
necessary government expenditures. Secretary Woodbury, 
commenting upon the situation, said : " It is impossible, . . . 



CUSTOMS REVENUE OF THE UNITED STATES 765 

that, with sources of revenue so fluctuating as ours, and so de- 
pendent on commercial prosperity, any fiscal operations should 
be long continued with ease, vigor, and uniformity, without some 
such regulator as a power to issue and redeem treasury notes, 
or to invest and sell the investment of surpluses. By any other 
course we should constantly be exposed to great deficiencies or 
excesses with all their attendant embarrassments." 

Frequent though less severe fluctuations in the customs rev- 
enue continued in the troubled years succeeding the crisis, nor 
did it again meet government demands till after the close of the 
period in 1843. This condition of affairs called forth from the 
secretary in 1839 the following complaint: "The principal 
sources of our revenue are sensibly affected by fluctuations, not 
only in commercial prosperity, but in the crops, the banking 
poUcy, and the credit systems of even foreign nations. The 
influence of these causes seems to become yearly more change- 
able and uncertain in its extent." National finances in conse- 
quence were most seriously affected. It was found necessary to 
create a new national debt. Two loans and five issues of treas- 
ury notes were resorted to between 1837 2-nd 1843, while the 
credit of the government " stood at a lower ebb than ever before 
in times of peace." The examination of this period of specula- 
tive expansion and collapse furnishes then a double exhibition 
of utter inflexibility of the customs tax system, when it should 
have been most flexible, and of extreme sensitiveness to changes 
in commercial and industrial conditions, when it should have 
been m.ost stable. 

5. The two decades following 1843 form another period of 
vigorous national growth accompanied by remarkable commer- 
cial activity. Reference to Chart I shows the rapid and enor- 
mous increase of foreign trade. Imports rose from ;^96, 390,000 
in 1844 to ^336,282,000 in i860. Mr. Walker speaks of 1846 as 
beginning a *'new commercial era " in which ** many causes com- 
bined to augment the trade among nations." The Mexican War 
and the crisis of 1857 were the only events which, in twenty 
years, seriously interfered with industrial prosperity. The 
demands of the government were at no time beyond the revenue 
that could have been obtained from legitimate taxation, while 
more than ordinary efforts were made to bring the tax income 



7^6 SELECTED READINGS IN PUBLIC FINANCE 

into exact conformity with public expenditures. A most favor- 
able opportunity therefore existed to test the adequacy of the 
customs revenue system. 

The financial history of the period, however, while it reveals 
a closer conformity of the tax income to the demands of the gov- 
ernment than previously, does not present the customs system in 
a favorable light. A high rate of specific duties had been levied 
in 1842 to enable the income to recover from the effects of the 
crisis of 1837. The first result was an increase considerably 
beyond government needs. By 1845 customs duties were pro- 
ducing 19.4 per cent more revenue than was called for by public 
expenditures. Then, though imports continued to increase, the 
income began seriously to decline. Mr. Walker, secretary of 
the treasury, declared that this decUne " rose from the prohibi- 
tory character of specific duties," and that " the revenue under 
the tariff of 1842 must have continued to sink so rapidly as soon 
to have caused a great deficit, even though in time of peace, 
and thus have required ultimately a resort to direct taxes or 
excises." 

As high specific duties had failed to produce adequate rev- 
enues, the secretary proposed a reduction, with ad valorem, duties. 
Congress therefore enacted a revenue law along these lines, 
designed to aid in vigorously carrying on the war with Mexico. 
But though the revenue from customs was thus increased, it fell 
far short of satisfying government needs during and immediately 
following the war. Only 43.2 per cent of the necessary pubhc 
income was received from such taxation in 1847, ^^-^ P^^" cent 
in 1848, and 65 per cent in 1849. With the year 1850, however, 
the income began to increase rapidly,^ and by 1853 '*a large 
surplus accumulated in the treasury and became a cause of alarm 
in commercial circles." Expenditures increased, but still the 
surplus grew. Alarm was felt that the accumulation of specie 
in the treasury might bring on financial stringency. An act was 
therefore passed, in 1857, reducing customs duties. This attempt 
to bring about an equilibrium of income and expenditure, like 
previous efforts, miscarried. It was impossible to reckon on the 
certainty of customs revenues. The crisis of 1857 brought with 

1 Not so rapidly as appears from the tables (see Appendix I). Before 1850 cus- 
toms revenues are net — after 1850, gross. 



CUSTOMS REVENUE OF THE UNITED STATES ^6"] 

it an immediate fall in the tax income of over ;^22,ooo,ooo. 
Before the end of the year 1857 Congress was obliged to author- 
ize an issue of ^23,716,300 in treasury notes and six months 
later to place a loan of ;^ 10,000,000. During the remainder of 
this period the receipts remained inadequate, exhibiting extreme 
sensitiveness to the political movements preceding the Civil War. 
A threatened revolution of a political character late in i860 drew 
the following complaint from the secretary of the treasury : 
" Already has the treasury been seriously affected by these 
causes. The receipts from customs for the last few days have 
greatly fallen off, and the limited amount received is composed 
each day of an increased proportion of treasury notes not yet 
due." Thus with an income insufficient even in time of peace 
and prosperity, the country entered upon a period of civil war. 
6. Though on a vastly greater scale, the financial conditions 
and results of the Civil War were quite similar in character to 
those of the War of 181 2. A very brief discussion of the later 
period will therefore suffice for the purposes of this paper. If, 
in the Civil War as in the War of 18 12, the income from cus- 
toms duties be contrasted with government expenditures, the 
result is even more unfavorable to this form of revenue. This 
is readily seen by a glance at Chart II and by a comparison of 
the following tables : 

WAR OF 1812 
(,000 omitted) 









Per Cent of 






Government 


Customs 


Customs Revenues 


Value 


Year 


Expenditures 


Revenues 


TO Government 
Expenditures 


OF Imports 


1810 . . 


^8,474 


^8,583 


IOI.2 


^61,008 


1811 






8,178 


13,313 


162.7 


zi.zn 


1812 






20,280 


8,958 


44.1 


68,534 


1813 






31,681 


13,224 


'41.4 


19,157 


1814 






34,720 


5,998 


17.2 


12,819 


1815 






32,943 


7,282 


22.1 


10,645 


1816 






32,196 


36,306 


II2.7 


129,964 


1817 






19,990 


26,283 


131-4 


79,891 



768 SELECTED READINGS IN PUBLIC FINANCE 



CIVIL WAR 
(,ooo omitted) 









Per Cent of 






Government 


Customs 


Customs Revenues 


Value 


Year 


Expenditures 


Revenues 


TO Government 
Expenditures 


of Imports 


i860 . . 


^63,200 


^53,187 


84.1 


^336,282 


1861 






66,650 


39,582 


59.3 


274,656 


1862 






469,570 


49,056 


10.4 


178,330 


1863 






718,734 


69,059 


9.6 


225,375 


1864 






864,969 


102,316 


1 1.8 


301,113 


1865 






1,296,817 


84,928 


6.5 


209,656 


1866 






523,565 


179,046 


32.2 


423,470 


1867 






357,542 


176,417 


49.3 


378,158 


1868 






377,340 


1 64,464 


43-5 


344,808 


1869 






322,865 


180,048 


55-7' 


394,440 



In the Civil War, however, as in the War of 18 12, it was 
beUeved to be impossible to obtain the whole of the necessary 
government revenues by means of taxation. The financial plan 
of the war, as detailed by the secretary of the treasury, pro- 
vided that the bulk of extraordinary income should be drawn 
from loans, taxation being relied upon to furnish only the means 
for the discharge of the ordinary demands, for the punctual 
payment of interest on loans, and for the creation of a gradu- 
ally increasing fund for the reduction of the principal. Such a 
tax revenue, it was confidently expected, would maintain the 
credit of the nation unimpaired. "The preference always 
evinced by the people of the United States, as well as their 
legislature and executive, for duties on imports " determined 
the secretary, when making provision for the necessary tax 
income, to recommend only such modifications of the existing 
tariff as would produce the principal part of the needed revenue, 
and such resort to direct taxes or internal revenue duties or 
excises as circumstances might require in order to make good 
whatever deficiency might be found to exist Customs duties 
were then distinctly regarded as the war taxes, and the success 
of the war policy is the test of their adequacy. 

From the beginning of the struggle the capacity of the cus- 



CUSTOMS REVENUE OF THE UNITED STATES 769 

toms revenue system was strained to the utmost. Additional im- 
port duties were imposed during the extra session of Congress in 
the summer of 1861. A further increase was made in December, 
soon after the next regular session had convened, and '' from 
that time till 1865 no session, indeed, hardly a month of any 
session, passed in which some increase of duties on imports 
was not made." The results were ridiculously meager. For 
the years 1861-62-63 the revenue remained almost absolutely 
inflexible, scarcely rising above the ordinary peace level. 
As early as 1863 Secretary Chase was forced to admit the 
failure of the policy of relying on customs revenues. In 
his report he said : " It is possible that a limited additional 
amount of income may be derived from judicious modifications 
of some provisions of the laws imposing duties on foreign 
imports, but the chief reliance for any substantial increase, and 
even for the prevention of possible decrease, must be on internal 
duties." Nevertheless a supreme effort was made in the great 
act of 1864 to bring about a substantial increase in the customs 
revenue. Imports were universally taxed, and at the highest 
rates that Congress dared impose. The result was disappoint- 
ing, and was a remarkable illustration, both of the inflexibility 
and the instability of the customs system. The excessive rates 
caused an immediate reduction of imports, and, instead of an 
increase, there was a fall in the amount of customs revenue, for 
1865, of more than seventeen miUions of dollars. 

In consequence of the meager income from taxation, the 
credit of the government early began to decline. Though all 
loans were nominally placed at not less than par, it was par 
in depreciated paper currency. The following table exhibits 
the rapid fall of public credit by showing the specie price of all 
obhgations issued during the war : 



For the Years Ending 


Gross Receipts from 
Debts Created 

- 


Gold Value of 
Gross Receipts 


Percentage 
Realized 


December 31, 1862 „ . . 

31, 1863 . . . 

31, 1864 . . 
September 30, 1865 ... 


^470,562,306 
663,748,162 
754,938,393 
675,984,729 


$420,657,784 
451,687,251 
384,462,432 
438,540,163 


89.39 
68.05 

50.93 
64.87 



770 SELECTED READINGS IN PUBLIC FINANCE 

The spectacle of a powerful and wealthy nation placing its 
loans at a discount of almost 50 per cent is strong evidence 
against its system of taxation. 

Though condemned by the failure of the war policy, the 
actual inferiority exhibited by the customs system in this emer- 
gency can be best shown by a comparison of the revenue re- 
ceived from it with that derived from internal revenue duties. 
The internal revenue system was only gradually put in operation 
after the beginning of the war, and first became productive in 
1863. In the next three years, however, ;^628,436,ooo were cov- 
ered into the treasury from this source as against ;^336,290,ooo 
from the customs tax system pushed to its greatest capacity. 
At the period of greatest stress, when the revenue from customs 
duties stood absolutely inflexible, the revenue from internal duties, 
though already greater than that from imports, was made to 
increase $100,000,000 in a single year. Further, while the 
income from customs was extremely uncertain, the flow of rev- 
enue from internal duties was a steadily rising stream, increas- 
ing from $109,000,000 in 1864 to $209,000,000 in 1865, and 
$309,000,000 in 1866.1 It is true, indeed, that after the stress of 
war was passed, customs duties furnished an enormously increased 
revenue, but quickness of response to financial measures is an 
absolute essential to adequacy. Here lay the chief merit of the 
internal revenue system. Its manifest superiority over the cus- 
toms system goes only to confirm the conclusions reached 
by the comparison of the two systems in the War of 18 12. It 
is probable, as H. C. Adams suggests, that had the internal 
revenue machinery been in operation two years earlier the war 
might have been brought to a more speedy termination, while 
the credit of the government could not have suffered as it did. 

7. The Civil War period financially considered closed about 
the year 1869, when the government ceased to borrow to 
satisfy the demands incurred on account of the war. The suc- 
ceeding years down to the present time form a period in which 
the general conditions were nearly the same in character as 
those following the War of 18 12. In this as in the former 
period, commercial, industrial, and national expansion followed 

1 Allowance must be made, however, for the fact that internal revenue duties were 
payable in depreciated paper currency. 



CUSTOMS REVENUE OF THE UNITED STATES //i 

the war ; in this- period also these manifestations of growth were 
accompanied by serious industrial disturbances ; in both periods 
a great national debt was saddled on the government. The 
financial history of the two periods is, naturally, quite similar. 
One great difference, however, exists. The internal Tevenue 
duties, which were abolished as soon as possible after the War of 
1812, were, in the later period, in part retained. From them the 
government has received a fairly steady and abundant revenue 
in addition to the income from customs duties. This fact may 
perhaps be taken as cause for denying the possibility of testing, 
by means of the fiscal criteria, the adequacy in this period of the 
customs revenue system. But the objection seems really without 
foundation. Customs duties are still regarded as the traditional, 
national system of taxation. They are only supplemented by the 
internal duties ; but this fact is, in itself, highly significant. 
That it has been deemed necessary in recent years thus to bolster 
up the customs system is, per se, one of the strongest proofs 
of the failure of that system to serve as an adequate source of 
national revenue. It will be admitted, however, that the employ- 
ment of the internal duties does render a direct comparison 
between customs revenues and public expenditures useless for 
the purposes of this paper. Yet a brief survey of the period is 
of great value to bring out two points — the over-abundance and 
inflexibility of customs revenues in a period of general pros- 
perity, and, at the same time, the extreme instability of the 
income from this source. 

At the beginning of this period speculative activity grew 
rapidly, commerce was greatly stimulated, and the tax income 
was in consequence remarkably large. As early as 1870, the 
revenue was more than ^100,000,000 greater than current pubHc 
expenditures, and the next year the excess was nearly as great. 
The public debt, though payments were made rapidly, could not 
absorb so great a surplus. It becam.e a menace to the prosperity 
of the nation. An immediate reduction of taxation was there- 
fore called for, and in 1872 a reduction of 10 per cent in the 
rate of customs duties was effected. But on account of the 
instability of the revenue the step proved disastrous. Crisis 
and industrial depression almost immediately followed, and both 
imports and customs duties were suddenly and extensively 



772 SELECTED READINGS IN PUBLIC FLNANCE 

decreased. Imports fell nearly ^100,000,000 in a single year 
and did not rise again to their normal volume until 1880. The 
revenue from customs which had stood at $216,370,000 in 1872 
dropped to $188,089,000 in 1873 and $163,103,000 in 1874. 
Then it became necessary for the government, which but three 
years before was contending with a $100,000,000 annual surplus, 
to resort to borrowing. In alarm, Congress, in 1875, restored 
the 10 per cent which had been taken from the rates of customs 
duties in 1872. But the revenue system which had proved so 
sensitive to commercial changes, did not respond to the effort 
of the government. The fall in the value of customs revenues 
continued until in 1878 it was $86,000,000 less than five years 
before. 

The revival of trade, however, which came about 1879, soon 
carried customs revenues to a higher point than ever before. 
By 1 88 1 the secretary of the treasury was again complaining 
of an embarrassing surplus revenue. This was estimated, in 
1883, at $85,000,000 per annum, and in 1886 Secretary. Man- 
ning reported that during the last years the surplus had averaged 
over $100,000,000. How to dispose of the immense hoard in 
the treasury became again the great financial problem. Con- 
gress had risked revenue reduction with disastrous results. It 
dared not again adopt this means of avoiding surplus. Natur- 
ally,i therefore, it now resorted to the other alternative — extrav- 
agant expenditure. By means of enormous appropriations the 
surplus was soon depleted. But here again Congress had failed 
to take sufficient account of the instability of the customs reve- 
nue system. The crisis of 1893 was at hand; the revenue from 
customs fell rapidly ; a deficit resulted, and the government has 
again been forced in a time of peace to make use of its credit. 
Thus the nation is repeating, apparently in the same order as 
before, the financial experiences of the earlier part of the period ; 
and the dreary alternative of embarrassing surplus and em- 
barrassing deficit bids fair to continue as long as the present 
revenue system existSo 

1 As Secretary Cobb has said : " When public revenues happen to be abundant, 
many projects are listened to and adopted by Congress, without careful regard to the 
burdens they may permanently impose." — Report of the Secretary of the Treasury, 
1857, p. 10. 



CUSTOMS REVENUE OF THE UNITED STATES 773 

The direct historical examination of the customs revenue sys- 
tem, in connection with the fiscal criteria previously laid down, 
has now been completed. This examination has extended over 
the whole experience of the United States in the use of the cus- 
toms revenue system as a national source of income. No period, 
therefore, remains whose events may contradict the conclusions 
drawn from this study so far as they relate to American finan- 
cial history. It will be well briefly to sum up the results of this 
discussion. 

In the historical survey a variety of national, industrial, and 
commercial conditions have been encountered, yet the testi- 
mony throughout is strikingly in accord. In the first period 
examined, while the nation was yet in its youth, and subject to 
strong foreign influences, the customs revenue, though on the 
whole abundant, was found to be uncertain to such an extent as 
rendered it an extremely precarious base on which to place the 
public finances. In the second period, under the stress of for- 
eign war, the financial policy based upon the customs revenue 
system utterly broke down, as a result of the insufficiency and 
inelasticity of this form of income. The generally favorable con- 
ditions of the third period, while accompanied by a redundancy 
of revenue, did not insure the nation against great instability of 
income, resulting from transient industrial disturbances. The 
fourth period under examination furnished a striking illustration 
of redundant customs revenue both as effect and cause of specu- 
lative expansion, and of the extreme instability of this form of 
revenue in time of acute commercial crisis. In the fifth period, 
under remarkably favorable general circumstances, the customs 
revenue, though on the whole abundant, still proved extremely 
sensitive to industrial and commercial disturbances. The Civil 
War period served only to illustrate on a larger scale the defects 
of the system that were found to characterize it in the War of 
18 1 2. And finally, in the full vigor of the nation, and in time 
of average prosperity, this form of revenue was found to be 
alternately, according to the transient character of industrial 
and commercial conditions, greatly in excess of and far beneath 
the income necessary for the support of the financial operations 
of the government. 

It will be seen that two factors are common to all these periods, 



774 SELECTED READINGS IN PUBLIC FINANCE 

viz. redundancy of revenue in time of commercial and industrial 
activity, and insufficiency and instability of revenue in time of 
stress and depression. On the whole it may be asserted, without 
fear of contradiction, that, throughout the history of the customs 
revenue system in the United States, the income from this source 
has been determined, not by government need, but, almost 
wholly, by the character of temporary industrial and, more 
especially, temporary commercial conditions. As a consequence, 
in war the current public income has proved utterly insufficient, 
unstable, and inflexible ; in peace it has shown itself extremely 
uncertain, fluctuating with every crisis and even with the changes 
in the policy and condition of foreign nations ; in times of pros- 
perity it has forced upon the treasury embarrassing surpluses, 
leading to extravagant expenditure, speculation, and crisis ; in 
adversity it has left the treasury empty, necessitating the lavish 
use of the public credit. 



CUSTOMS REVENUE OF THE UNITED STATES 775 



APPENDIX TO CHAPTER XVIII 

IMPORTS, CUSTOMS REVENUE, AND EXPENDITURES OF THE 

UNITED STATES, 1791-1893 

(,000 omitted) 













Per Cent of 




Total 


Value 


Government 
Expenditures 


Value 


Customs 


Year 


Value 
Imports 


OF Dutiable 
Imports 


OF Customs 
Revenue 


Revenue to 
Government 












Expenditures 


1791 


$28,687 





$3,107 


^4,399 


14I.5 


1792 






29,746 


— 


8,269 


3.343 


41.6 


1793 






28,990 


— 


3.846 


4,255 


1 10.3 


1794 






28,073 


— 


6,297 


4,801 


76.2 


1795 






61,266 


— 


7.309 


5.588 


76.6 


1796 






55^136 


— 


5.790 


6,567 


1 134 


1797 






48,379 


— 


6,008 


7.549 


125.6 


1798 






35.551 


— 


7,607 


7,106 


93-4 


1799 






33.546 


— 


9.295 


6,610 


71. 1 


1800 






52,121 


— 


10,813 


9,080 


83-9 


i8oi 






64,720 


— 


9.393 


10,750 


1 14.4 


1802 






40,558 


— 


7.976 


12,438 


155-9 


1803 






51.072 


— 


7.952 


10,479 


131.7 


1804 






48,768 


— 


8,637 


11,098 


127.3 


1805 






67,420 


— 


9,014 


12,936 


143-5 


1806 






69,126 


— 


9,449 


14,667 


155-2 


1807 






78,856 


— 


8,354 


15.845 


189.6 


i8o8 






43.992 


— 


9,061 


16,363 


180.5 


1809 






38,602 


— 


10,280 


7.257 


70.5 


1810 






61,008 


— 


8,474 


8,583 


101.2 


1811 






37.377 


— 


8,178 


13.313 


162.7 


1812 






68,534 


— 


20,280 


8,958 


44.1 


1813 






19.157 


— 


31,681 


13,224 


41.4 


1814 . 






12,819 


— 


34,720 


5.998 


17.2 


1815 






106,457 


— 


32,943 


7,282 


22.1 


1816 . 






129,964 


— 


32,196 


36,306 


112.7 


1817 






79,891 


-^ 


19,990 


26,283 


131-4 


1818 . 






102,323 


— 


20,018 


17,176 


85.2 


1819 » 






67.959 


— 


21,522 


20,283 


94.2 


1820 . 






56,441 


— 


18,285 


15.005 


82.0 


1821 . 






43,696 


$41,965 


15.849 


13.004 


82.5 


1822 , 




e « c 


68,395 


64,841 


15,000 


17.589 


1 1 7.2 



776 



SELECTED READINGS IN PUBLIC FINANCE 



IMPORTS, CUSTOMS REVENUE, AND EXPENDITURES OF THE 

UNITED STATES, 1791-1893 {Continued^ 

(,ooo omitted) 



Year 











Per Cent of 


Total 


Value 


Government 


Value 


Customs 


Value 


OF Dutiable 


OF Customs 


Revenue to 


Imports 


Imports 




Revenue 


Government 
Expenditures 


^51.310 


^48,684 


^14,706 


^19,088 


129.7 


53,846 


50,763 


20,273 


17,878 


88.1 


66,395 


62,687 


15,857 


20,098 


126.7 


57.652 


53,002 


17,037 


23,341 


137.0 


54,901 


52,010 


16,139 


19,712 


122.1 


66,975 


62,963 


16,394 


23,205 


141.5 


54,741 


51,259 


15,184 


22,681 


142.7 


49,575 


46,063 


15,142 


21,922 


144.7 


82,808 


77,300 


15,237 


24,224 


158.9 


75,327 


68,330 


17,288 


28,465 


164.6 


83,470 


63,258 


23,017 


29,032 


1 26. 1 


86,973 


47,248 


18,627 


16,214 


87.0 


122,007 


64,211 


17,572 


19,391 


1 10.3 


158,811 


88,690 


30,868 


23,409 


75.8 


113,310 


62,333 


37,243 


11,169 


29.9 


86,552 


48,391 


33,864 


16,158 


47-7 


145,870 


80,682 


26,896 


23,137 


85.6 


86,250 


44,139 


24,314 


13,499 


55.5 


114,776 


57,698 


26,481 


14,487 


54.7 


87,996 


64,650 


25,134 


18,187 


72.3 


37,294 


25,722 


11,780 


7,046 


59.8 


96,390 


79,705 


22,483 


26,183 


1 1 6.4 


105,599 


89,934 


22,954 


27,528 


1 19.4 


1 10,048 


91,401 


27,261 


26,712 


97-9 


116,257 


100,419 


54,920 


23,747 


43-2 


140,651 


125,705 


47,618 


31,757 


66.6 


132,565 


118,854 


43,581 


28,346 


65.0 


164,034 


148,051 


40,948 


39,668 


96.8 


200,476 


182,565 


47,821 


49,017 


102.5 


195,387 


173,737 


44,560 


47,339 


106.2 


250,157 


225,424 


48,164 


58,931 


122.3 


276,088 


253,535 


57,916 


64,224 


1 10.8 


231,650 


201,736 


59,502 


53,025 


89.1 


295,650 


246,047 


69,111 


64,022 


92.6 


333,5^1 


283,569 


67,997 


63,875 


93-9 


242,678 


187,385 


74,556 


41,789 


56.0 


316,823 


249,966 


68,993 


49,565 


71.8 



1823 
1824 
1825 
1826 
1827 
1828 
1829 
1830 
I83I 
1832 

1833 
1834 
1835 
1836 

1837 
1838 

1839 

1840 

I84I 

1842 

1843 
1844 

1845 
1846 
1847 
1848 
1849 
1850 

I85I 

1852 

1853 
1854 
1855 

1856 

1857 
1858 
1859 



CUSTOMS REVENUE OF THE UNITED STATES 777 



IMPORTS, CUSTOMS REVENUE, AND EXPENDITURES OF THE 
UNITED STATES, 1791-1893 {^Continued) 

(,cx)o omitted) 













Per Cent of 




Total 


Value 


Government 
Expenditures 


Value 


Customs 


Year 


Value 
Imports 


OF Dutiable 
Imports 


of Customs 
Revenue 


Revenue to 
Government 












Expenditures 


i860 ..... 


^336,282 


^267,891 


^63,200 


^53,187 


84.1 


1861 








274,656 


207,235 


66,650 


39,582 


59.3 


1862 








178,330 


128,487 


469,570 


49,056 


10.4 


1863 








225,375 


195,348 


718,734 


69,059 


9.6 


1864 








301,113 


262,950 


864,969 


102,316 


1 1.8 


1865 








209,656 


169,559 


1,296,817 


84,928 


6.5 


1866 








423,470 


366,349 


523,565 


179,046 


32.2 


1867 








378,158 


361,125 


357,542 


176,417 


49.3 


1868 








344,808 


329,661 


377,340 


164,464 


43.5 


1869 








394,440 


372,756 


322,865 


180,048 


55-7 


1870 








426,346 


406,131 


309,653 


194,538 


62.8 


1871 








500,216 


459,597 


292,177 


206,270 


70.6 


1872 








560,419 


512,735 


277,517 


216,370 


77-9 


1873 








663,146 


484,746 


290,345 


188,089 


64.7 


1874 








567,443 


414,748 


302,633 


163,103 


53.8 


1875 








526,260 


379,795 


274,623 


157,167 


56.5 


1876 








464,586 


324,024 


265,101 


148,071 


55.8 


1877 








439,829 


298,989 


241,334 


130,956 


54.2 


1878 








438,422 


297,083 


236,964 


130,170- 


54-9 


1879 








439,292 


296,742 


266,947 


137,250 


514 


1880 








627,555 


419,506 


267,642 


186,522 


69.6 


1881 








650,619 


448,061 


260,712 


198,159 


72.0 


1882 








716,213 


505,491 


257,981 


220,410 


85.0 


1883 








700,829 


493,916 


265,408 


214,706 


80.8 


1884 








667,575 


456,295 


244,126 


195,067 


79.9 


1885 








579,580 


386,667 


260,226 


181,471 


69.7 


1886 








625,308 


413,778 


242,483 


192,905 


79-5 


1887 








683,418 


450,325 


267,932 


217,286 


81.0 


1888 








712,248 


468,143 


297,924 


219,091 


81.7 


1889 








741,431 


484,856 


299,288 


223,832 


74.7 


1890 








773,674 


507,571 


318,040 


229,668 


72.2 


1891 








854,519 


466,455 


365,774 


219,522 


60.0 


1892 








813,601 


355,526 


345,023 


177,452 


51-4 


1893 ..... 


844,454 


400,282 


383,478 


203,355 


53.0 



778 



SELECTED READINGS IN PUBLIC FINANCE 



(The figures for the next eleven years, stated in millions of dollars, were 
follows : 



Year 


Total Imports 


Dutiable 
Imports 


Expenditures 


Customs 
Revenues 


1894 .... 


636.6 


257.6 


367.5 


131.8 


1895 . c , . 


731-2 


354.3 


356.2 


152.2 


1896 .0.0 


759»7 


390.8 


352.2 


160.0 


1897 . . . ^ 


789-3 


407-3 


365.8 


176.5 


1898 .... 


587.2 


295.6 


443-4 


149-6 


1899 .... 


685.4 


385.8 


605.1 


206,1 


1900 CO.. 


830.5 


463.8 


520.9 


233-2 


I9OI c c . C 


807.8 


468.7 


524.6 


238.6 


1902 .... 


899.8 


503.3 


485.2 


254-4 


1903 .... 


1007.9 


570.7 


517-0 


284.5 


1904 ...» 


981.8 


527-7 


583-7 


261.3 



— Ed.) 



CHAPTER XXI 

THE INTERNAL REVENUE SYSTEM OF THE UNITED 

STATES 

81. The Taxation of Spirits (1862-1870). — The Civil War 
compelled our national government to create a most extensive 
and complicated system of internal taxes, — upon incomes, upon 
commodities, upon transactions. Of the war taxes upon com- 
modities none had a more interesting or instructive history than 
that upon distilled spirits, the history of which was thus narrated 
by Mr. David A. Wells : ^ 

Previous to the war the manufacture of spirits was free from 
all specific taxation or supervision by either the national or state 
governments ; and being produced mainly from Indian corn, at 
places adjacent to the localities where this cereal was cultivated, 
was afforded at a very low price — the average market price in 
New York for the five years preceding the year 1862 having 
been 24 cents per proof gallon ; with a minimum price during 
the same time of 14 cents per gallon. The price of alcohol 
during the same period ranged from 45 to 65 cents per gallon. 
Under such circumstances the consumption of spirits, for a great 
variety of purposes, in the United States previous to the war 
had become enormous; the estimated product for the year i860 
having been in excess of 90,000,000 of gallons ; while the maxi- 
mum quantity exported in any one year was not in excess of 
3,000,000 of gallons. One of the purposes for which this 
product of spirits was extensively used at this time, which was 
previous to the discovery and use of petroleum, was the manu- 
facture of "burning fluid" — an illuminating agent composed 

^ David A. Wells, The Recent Financial, Industrial, and Commercial Experi- 
ences of the United States. Cobden Club Essays, second series. Reprinted, 
New York, 1872. 

779 



78o SELECTED READINGS IN PUBLIC FINANCE 

of one part of rectified spirits of turpentine, mixed with from 
four to five parts of alcohol ; and so extensive was the manufac- 
ture and consumption of this article, that it was stated on the 
floor of Congress in 1864 that in the city of Cincinnati alone 
the amount of alcohol required every twenty-four hours for this 
industry was equivalent to the distillate of 12,000 bushels 
of corn. The excessive cheapness of alcohol also led to most 
extensive use of it for fuel in domestic culinary operations, for 
bathing and cleaning, for the manufacture of varnishes and 
patent medicines, and for a great variety of other purposes. It 
is also to be noted that nearly all preparations and washes for 
the hair, which at that time in other countries — as now univer- 
sally — were prepared almost exclusively on a basis of fats and 
oils, were in the United States then composed almost wholly on 
a basis of alcohol ; the comparative difference in the price of 
this article in the United States and Europe giving an entirely 
different composition to products of large consumption intended 
to effect a common object. 

The immediate effect of the imposition and continued increase 
of internal taxes upon distilled spirits was to revolutionize all 
these branches of industry, and in some instances to utterly 
destroy them. The manufacture of burning fluid as an illumi- 
nating agent entirely ceased ; the necessity of its employment 
being at the same time most fortunately supplanted by the 
discovery of vast natural supplies of petroleum, and by the use 
of its derivatives. And as illustrative of the compensations 
which invariably attend the losses immediately contingent upon 
industrial progress, through disuse of old methods and machin- 
ery, it may be stated that although the business of the manufac- 
ture of burning fluid ceased, the business of collecting, preparing, 
and exporting petroleum rapidly became one of the most impor- 
tant in the country; while the demand at home and abroad for 
glass lamps and their appurtenances, adapted to the use of the 
distillates of petroleum, was alone sufflcient to employ the entire 
manufacturing capacity of the glassworks of the United States 
for a period of two years. 

Druggists and pharmaceutists in the United States estimated 
the reduction in the use of alcohol in their general business, 
consequent upon its increased cost from taxation, at from one 



THE INTERNAL REVENUE SYSTEM 781 

third to one half. Manufacturers of patent medicines and 
cosmetics abandoned their old styles of preparation and adopted 
new. Varnish makers reported to the revenue commission a 
reduction in the use of spirits in their business to the extent of 
80 per cent ; while a manufacturer of horse medicines, using 
formerly 50,000 proof gallons per annum, testified that his 
business was in the main destroyed. The same result also hap- 
pened to a firm engaged in the manufacture of a substitute for 
whalebone, which previous to the tax on spirits was coming into 
extensive use ; and as further showing how curiously other and 
apparently remote industries were affected by this tax, a large 
business of exporting cider to the Pacific, which for transporta- 
tion through the tropics required to be fortified with alcohol, was 
seriously curtailed ; while the increased price of vinegar, before 
manufactured largely from whisky, so far affected the cost of 
the manufacture of pickles and white lead as greatly to diminish 
domestic consumption and almost entirely prevent exports. 

The first tax imposed on distilled spirits, of domestic produc- 
tion, was, as already stated, 20 cents per proof gallon. This 
tax yielded for the year ending June 30, 1863, a revenue of 
$3,229,911, indicating a production of 16,149,955 proof gallons. 
The tax of 20 cents continued in force until March, 1864, when 
the rate was advanced to 60 cents per gallon. The revenue 
derived from distilled spirits for the fiscal year ending June 30, 
1864, under the two rates as above indicated, was $28,431,000. 
On the lOth of July, 1864, the tax was further advanced to $1.50 
per proof gallon, and on the ist of January succeeding to $2. 
The revenue derived from this source, for the fiscal year ending 
June 30, 1865, from the two rates, was $15,007,000; and for the 
succeeding fiscal years 1866 and 1867, under the uniform tax of 
$2, was respectively $29,481,000 and $29,164,000. 

With the advent of high taxes upon this article, however, the 
initiation and practice of frauds upon the revenue commenced 
upon a most gigantic scale, and soon became so successful and 
so reduced to a system that in 1868 it seemed as if the whole 
country and the government itself were becoming corrupted 
and demoralized. 

In the outset, while the war and its varying fortunes were 
engrossing the attention of the government and the people, the 



782 SELECTED READINGS IN PUBLIC FINANCE 

efforts made to repress and punish frauds in this particular were 
absolutely of no account whatever ; and, indeed, it may be alleged 
with truth that the whole spirit and working of the statute was in 
the direction of the encouragement and promotion of fraud — 
Congress in the first instance, under the influence of speculators, 
having advanced the rate of taxation on two occasions, with 
ample premonition, and without making the advance applicable 
to stocks on hand manufactured in anticipation of the legisla- 
tion in question ; and secondly, by so devising the law and 
providing for its execution as to make the detection and proof 
of fraud virtually impossible. Under this state of things there 
were repeated instances where distillers manufactured, conveyed 
to market, and fraudulently sold spirits in quantities varying 
from 20,000 to 80,000 gallons and upward, without a suspicion 
on the part of the local officers that the business was not in all 
respects conducted legally and honestly. It was also sworn to 
before the revenue commission in 1865-66 that the determina- 
tion of the strength of the distilled spirits preparatory to assess- 
ment was often made by mere physical inspection or taste, and 
that the use of instruments (for which no uniform standard was 
provided) was discarded as something entirely unnecessary. 
It was also not infrequently the case that the barrels were 
inspected and branded some days in advance of their being 
filled, and the future regulation, the filling and removal, left 
entirely with the manufacturer. Distillers and their workmen 
were sometimes constituted inspectors of their own products, 
and in one instance an assessor was known to have been ap- 
pointed who did not possess sufficient intelligence to understand 
or correctly use either a gauging rod or a hydrometer. Thus 
it was at the commencement ; but subsequently, and after the 
close of the war, when the administration of the laws became 
more intelligent and vigorous, and some degree of concealment 
to the projectors of fraud became necessary, the expedients 
successfully adopted for the evasion of the tax were in the 
highest degree characteristic of the ingenuity of the people. 

One of the most fertile of these expedients was made avail- 
able through a provision of law which allowed spirits to be made 
and stored in bond, or exported in bond without prepayment of 
the taxes. Thus, for example, spirits deposited in bond were, 



THE INTERNAL REVENUE SYSTEM 783 

through the connivance and corruption of poorly paid officials, 
secretly withdrawn from bond, the barrels filled with water, or 
some cheap compound, and subsequently exported. On receipt 
of the landing certificate, obtained through a consul of an inferior 
grade in some remote country, the bonds given by the manufac- 
turer for the payment of the taxes were canceled, and the profits 
divided among all concerned ; while the barrels and contents, 
being once placed beyond the jurisdiction of the United States, 
were left either in a foreign bonded warehouse, or on foreign 
wharves, to take care of themselves. And thus it was that from 
Turkish ports in the Levant, and from places in Southern Asia, 
Africa, and Central America there came, in due time and in 
succession, not a few official inquiries in respect to the dispo- 
sition of American property for which there was no recognized 
owner. 

In one instance a considerable quantity of what purported 
to be spirits left a bonded warehouse for transportation in bond 
by a long, slow voyage down the Mississippi to New Orleans. 
On arrival at the port of destination the entire contents of the 
barrels was found to have escaped, through shrinkage and im- 
perfect construction of the packages ; and proof being submitted 
of the loss, the bonds given for delivery were canceled. It is 
needless to say, that what left the warehouse was not the spirits 
for which the bonds were originally given, but a substitute of 
water flavored with spirit, and that the imperfect material and 
construction of the barrels was designed to effect the very object 
which was accompHshed, namely, the accounting for the de- 
struction of what was known to have been the product of the 
distillery. 

In short, such a tax, of about 800 per cent on the manu- 
facturing cost of the article in question, the enormous profits 
consequent upon the evasion of the law, and the abundant 
opportunity which the law itself, and the vast territorial area 
of the country offered for evasion, constituted a temptation 
which it seemed impossible for either manufacturers, dealers, 
or officials to resist ; and the longer the tax remained at a 
high figure, the less became the revenue, and the greater the 
corruption. 

During the year 1867 the revenue directly collected from dis- 



784 SELECTED READINGS IN PUBLIC FINANCE 

tilled spirits, as already stated, was about twenty-nine millions 
of dollars, but during the succeeding year, 1868, with no diminu- 
tion, but rather an increase of the quantity manufactured and 
consumed, the total revenue from the same source was but Httle 
in excess of fotirteeit millions ; proof spirits, at the same time 
being openly sold in the market, and even quoted in price 
currents, at ixQn\ five X.o fifteen cents less per gallon than the rate 
of tax and the average cost of manufacture. We have also in 
these figures the materials for approximately estimating the 
measure and strength of the temptation to evade the law, and 
the amount of profit that accrued in a single year from the re- 
sults of such evasion ; for, as the consumption of distilled spirits 
for all purposes in the country during the year 1868 was prob- 
ably not less than sixty millions of gallons, and as out of this the 
government collected a tax upon only about seven millions of 
gallons, the sale of the difference, at the current market rates, 
^1.90, less the average cost of production, thirty cents, must have 
returned to the credit of corruption, a sum approximating eighty 
milliojis of dollars. 

But notwithstanding the fact that the current price at which 
distilled spirits were sold in the markets was less than the 
amount of tax, was everywhere recognized, and commented on 
by the press ; and notwithstanding that the existence and extent 
of the frauds in the manufacture and sale of the spirits was for 
three years officially reported upon in detail by officers of the 
treasury, it was with great difficulty that Congress could be in- 
duced to take any action, looking to remedies by the enactment 
of more perfect laws, providing for more efficient administration 
of the law, or for diminishing the temptation to fraud by reduc- 
ing the tax ; and it was not until the revenue from this source 
bade fair to disappear altogether, and the popular manifestation 
of discontent became very apparent, that anything really was 
accomplished ; a report from the committee of ways and means 
to the house of representatives in favor of a new law and a re- 
duction of the tax having been actually delayed a whole year 
by the appeal of a leading member from the state of New York 
for postponement, on the ground that it would be derogatory to 
the honor of a great nation, after having triumphed in the most 
gigantic of civil wars, to confess, by a reduction of the rates, its 



THE INTERNAL REVENUE SYSTEM 785 

inability to control the production and sale of whiskey. How 
expensive this speech and its resulting delay proved to the 
treasury is shown by the circumstance, that when the tax was 
reduced the next year from $2 to 60 cents per gallon, and the 
law in other respects modified, so as to prevent transportation 
in bond — holding every distillery liable to account, according to 
capacity, for each day's product, and forfeiting real estate as well 
as personal property connected with the performance of illegal 
acts — the revenue from all taxes, direct and indirect (licenses, 
etc.), in the manufacture and sale of domestic spirits, increased 
the very first year to the extent of ;^2 7,000,000 ; or, from $iS,- 
000,000 in 1868 to ^45,000,000 in 1869, and ^5 5,000,000 in the 
succeeding year, 1870. 

82. Internal Taxation from 1870 to 1894. — Most of the duties 
upon commodities were repealed after the war, but a number 
of internal taxes were retained. The act of July 14, 1870, left 
in operation the duties upon spirits, fermented liquors, and 
tobacco; as well as stamp duties and some other taxes. The 
subsequent history of the internal revenue system is described 
by Dr. Frederic C. Howe, as follows : ^ 

Previous to i860, as we have seen, the excise had been viewed 
as a sort of fiscal reserve, only to be brought into action in case 
of urgent necessity ; but at the termination of the Civil War, in 
view of the burden of indebtedness which it had entailed, it be- 
came apparent that the earlier resources were no longer adequate 
to satisfy the larger fiscal needs of the country. The war had, 
moreover, induced a more generous view of the -Constitution, and 
the conservative hostihty which had prevented the utilization of 
federal powers during the long tenure of the Democratic party 
no longer existed ; while the subsequent inclination of the gov- 
ernment to engage in all sorts of expenditure for various internal 
purposes rendered the utilization of inland sources as a portion 
of the permanent fiscal service a necessity. The reduction in ex- 
penditure between the years 1866 and 1870 rendered it possible 

1 Taxation in the United States, 215 et seq, (New Yorkj T. Y. Crowellj 1896c) 
Reprinted with the consent of the author and publishero 



;86 SELECTED READINGS IN PUBLIC FINANCE 

to dispense with nearly all the extraordinary war taxes, and to 
concentrate the system upon the broad and elastic basis of 
consumption. The income tax was retained until 1872, as were 
the bank taxes, and several unimportant duties on manufactured 
products. . . . 

The suitableness of distilled and malt liquors and tobacco for 
taxation is recognized by nearly every civilized country, and it 
is the uniform practice of European governments to derive from 
them the largest possible revenue consistent with efficiency of 
administration. Of well-nigh universal consumption as they are, 
socially harmful in their effects, and non-essential to the comfort 
and well-being of a people, the payment of the taxes upon whiskey, 
beer, and tobacco may be viewed as a sum abstracted from the 
surplus fund of individual income. Furthermore, such taxes are 
but little obstructive of industrial freedom, and there is no 
evidence that even the highest rate imposed has ever proven 
productive of any very general discontent. From the mass of 
the people the cry for free whiskey and free tobacco meets no 
answering response ; and in the past such agitation has been 
largely of a political character, for the purpose of distracting 
attention from an increase in the tariff rates, or an attempt to 
reduce a possible surplus in the treasury. 

Since 1868 the history of the taxation of these subjects has 
been quite uneventful. The reduction of the rate on distilled 
spirits to 50 cents a gallon was accompanied with results most 
phenomenal. It is possibly too much to ascribe the subsequent 
increase in the revenues and improvement in their collection 
wholly to the reduction of the rates ; for changes in the method 
of administration were also introduced, which greatly simplified 
collections, and rendered evasion by the ordinary methods well- 
nigh impossible. Since this time all taxes, specific, ad valorem^ 
and license, have been collected by means of stamps, affixed to 
the packages containing the commodity or displayed in the place 
of business. The specific tax of 50 cents on whiskey, with the 
subsidiary capacity tax, remained in force from July, 1868, to 
August, 1872, during which period the tax was assessed upon an 
average production of 67,000,000 gallons, which yielded an 
average annual revenue of ;^34,ooo,ooo, indicacing an average 
annual per capita consumption of 1.65 gallons. 



THE INTERNAL REVENUE SYSTEM ^^7 

By the same Act the rates upon manufactured tobacco and 
cigars were placed as follows : 

Snuflf o ^0.32 per pound 

Chewing and other tobacco prepared by hand . . 0.32 " 

Smoking tobacco . q.i6 '* 

Cigars o . o . . 5.00 per looo 

Cigarettes 1.50 " 

Alterations were also made in the method of assessment. 
Instead of the tax being collected after removal from the place 
of manufacture and sale, the duty from this time on was prepaid 
by means of soluble stamps/ placed upon the package at the 
place of manufacture. Goods were required to be placed in 
certain forms of packages, which were to indicate the manu- 
facturers' name, place of manufacture, trade-mark, contents, and 
weight of package, etc. Itemized returns were also required 
from the producer in regard to his business. Failure to comply 
with these requirements rendered the producer liable to heavy 
penalties, as did any attempt to place untaxed goods on the 
market by a dealer. By the same Act existing taxes on mineral 
or illuminating oils and refined petroleum were repealed. 

The revenues from tobacco immediately responded to the 
change. In 1868 the receipts were ^18,729,000. In 1869 they 
rose to ;^23, 430,707, a gain of four and three quarter millions. 
Again, in 1870, they increased to ^31,350,707, and in 1871 to 
$33,578,907, Fraudulent evasion of the tax was greatly dimin- 
ished. Some little loss did occur through the refilling and 
re-use of stamped packages, and the improper classifications of 
manufactured tobacco. It was easily possible for producers to 
take advantage of the difference of rates on chewing and smok- 
ing tobacco to place the former on the market at rates applicable 
only to the latter ; and it was difficult to impute or prove fraud, 
or to correct the evil, save by a uniform rate, which change was 
later adopted. 

But, despite the gratifying showing of the revenues, agitation 
was soon renewed for change. The profits previously secured 
by speculators and producers from legislative changes were too 
sweet to be willingly relinquished ; and Congress was not deaf 

1 The stamps were printed in fugitive ink, which disappeared when washed for the 
purpose of re-use. 



788 SELECTED READINGS IN PUBLIC FINANCE 

to the proposals for an increase of duties, by which gains were 
legislated into the pockets of speculators by increasing the rate 
without rendering it applicable to stock in bond. At the same 
time temperance agitators, who viewed a high rate on whiskey 
and tobacco as. advisable on sumptuary grounds, advocated an 
increase in the duties, thinking it would serve as a deterrent to 
their use. In 1872, in response to this pressure, the rate upon 
whiskey was changed from the mixed one then prevailing, the 
barrel and capacity tax being "repealed, whil? the specific 
rate was increased by 20 cents, or to 70 cents per gallon. 
The change was largely an administrative one, as the several 
duties then prevailing had aggregated between 65 and 70 
cents per gallon. By the same measure all manufactured 
tobacco, whatever its value or use, was rendered dutiable at 
a uniform rate, the duty up to 1875 being 20 cents per 
pound. ^ While this was equivalent to a reduction of 6 cents 
per pound or of 22J per cent on the average rate for the two 
preceding years, the diminution in receipts from tobacco for the 
year 1873 was but little over one million dollars, while the increase 
in tax-paid production was over nineteen and one half million 
pounds, a result traceable in large part to the fact that unmanu- 
factured tobacco under the new law was taxed at substantially 
the same rate as the manufactured article, whereas it had 
formerly been practically exempt. 

These changes were uniformly in the line of improvement ; 
for while it is to be acknowledged that there is some injustice 
in the taxation of any article like tobacco, whose value varies so 
widely, at a uniform rate, experience has shown that assessments 
are likely to be so arbitrary that a specific rate is preferable to 
an ad valorem oae, for the latter offers great opportunities for 
fraudulent practice, false swearing, and complications in valua- 
tion. 

Again, in 1875, the rate on spirits was advanced to 90 
cents per gallon, where it remained unaltered until 1894. In 
the taxation of the latter article the experience of these years 
was marked by phenomena similar to those of the war, although 
less monstrous, and brought home to officials high in the govern- 
ment service. It is not true, however, as is frequently asserted, 
1 When it was again increased to 24 cents per pound. 



THE INTERNAL REVENUE SYSTEM 789 

that the frauds disclosed in 1875 were due to the increase in 
the rates ; for, although discovered immediately after the passage 
of the Act of that year, they were traceable to complicity and 
conspiracy of officials, and had been in existence for many years 
previous to the change. That the increase of the rate to 90 
cents was a source of gain to speculators there is no doubt, for 
the new duty was not made operative on stock in bond. During 
the three months previous to the date when the increased rate 
went into operation, there was made and stored sufficient spirits 
to cause a loss to the revenues of ;^ 1,400,000. This loss was but 
temporary, however; and from this time on down to the present 
day the revenues from this source have steadily increased in 
amount, and there is no reason to suppose that the tax was not 
as universally collected as under the earlier and lower rate. 

"With the general revival of trade which set in during the years 
immediately preceding 1880, the receipts from the several sources 
of internal revenue manifest a marked improvement. Beginning 
with 1878, they increase from ^110,000,000 in that year to 
$124,000,000 in 1880, to $135,000,000 in 1881, and to 
$146,500,000 for the fiscal year 1882. At this time there 
remained, as a heritage of the war, taxes upon the following 
subjects, which produced for the fiscal year 1882 the following 
sums : 

Friction matches ^3,272,258.00 

Patent medicines, perfumery, etc i>978,395.56 

Bank checks 2,318,455,14 

Bank deposits 4,007,701.98 

Savings-bank deposits .0 88,400.47 

Bank capital 1,138,340.87 

Savings-bank capital 14,729.38 

^12,818,281.40 

At the same time taxes were collected by the treasurer of the 
United States from national banks as follows : 

On national-bank deposits ^5,521,927.47 

On national-bank capital . 437,774.90 

Collections from national banks ^5>959>702.37 

making a total collection of $18,777,983.77. 

As early as 1880 the commissioner of internal revenue had 
advised the repeal of all these taxes, and reiterated his suggestion 



790 SELECTED READINGS IN PUBLIC FINANCE 

two years later, when he further advocated an abatement of 
40 per cent in the special license charges then existing upon 
rectifiers, wholesale and retail liquor dealers, and tobacconists, 
from which an additional reduction in the revenues of ^3,000,000 
was expected. 

The Act of March, 1879, ^^.d reduced the rate on manufactured 
tobacco by one third, or from 24 to 16 cents per pound; and 
a corresponding reduction on the rate on cigars would 
cause a further diminution in the revenue of ;$6,746,ooo, which 
the commissioner also recommended. 

These suggestions were substantially followed in the abolition 
of all adhesive stamps imposed on matches, proprietary medi- 
cines, perfumes, and bank checks, the abatement taking effect 
July I, 1883. The duties on bank deposits and capital ceased 
at the beginning of the same calendar year ; while the rates on 
tobacco in all its forms, as well as the special license taxes, 
were reduced 50 per cent. The loss to the revenue from these 
combined abatements was variously estimated at from forty 
to forty-five millions, including the ^6,000,000 collected from 
national banks by the treasurer. The loss fell much short of 
this estimate, however, the total decrease for 1884 being 
less than ^23,000,000, a considerable gain being manifest in 
spirits and other sources. The chief loss lay in tobacco, from 
which the receipts fell from ^47,391,000 in 1882, and ^42,104,000 
in 1883, to ^26,062,000 in 1884. Inasmuch as the collections of 
1882 were made under the old rate entirely, and those of 1884 
wholly under the new one, it shows a falling off of ^21,229,000, 
or nearly 45 per cent. When it is borne in mind that popula- 
tion was increasing at the rate of one and a quarter millions per 
year, it would seem to indicate that'the consumption of tobacco 
was but little affected by the tax rate ; for the increase in annual 
consumption after the reduced rate, as indicated by removal from 
bond, was but three and one half million pounds, the total 
withdrawals being less than the average quantity with- 
drawn for several preceding years at double the rates. 
At the same time a perceptible increase in the number 
of firms engaged in tobacco manufacture was remarked, a fact 
which seems to indicate the tendency of a high tax rate to con- 
centrate the business into a few hands. 



THE liNTERNAL REVENUE SYSTEM 791 

In 1890 another reduction of 25 per cent was made in the 
rates upon snuff, chewing and smoking tobacco, while all 
special license taxes upon the sale of tobacco were repealed. 

The total receipts from tobacco in all its forms for 1893 were 
about $32,000,000, a sum which would have approximated 
$60,000,000 had the taxes existing in 1882 been allowed to 
remain unchanged. For the same year, the per capita revenue 
collected in the United States from this subject was but 48 
cents, as against 90 cents in 1882, and as opposed to $1.71 
in France, and $1.50 in Great Britain. Manifestly the revenues 
from" this source are susceptible of increase. In recent years 
the growth in the consumption of tobacco has been phenomenal. 
In 1892 the per capita consumption of smoking and chewing 
tobacco was four pounds, while the number of cigars and 
cheroots returned for taxation was 4,548,799,487. As compared 
with other countries, the consumption of tobacco in America is 
about two and a half times as great as in England and France, 
slightly in excess of that in Holland and Belgium, and some- 
what less than that of Germany. 

The tax upon malt liquors has remained practically unchanged 
since the organization of the system in 1862, namely, at $1 
per barrel of thirty one gallons. 

In 1894, in order to obtain additional revenue, certain 
changes were made in the internal duties, as described by Dr. 
Howe :^ 

In addition to the duty upon incomes, the measure of Aug. 
28, 1894, provided for a tax of 2 cents per pack upon playing 
cards sold within the United States subsequent to Aug. i, 1894, 
as well as an increase of 22^- per cent in the rate upon distilled 
spirits, or from 90 cents to $1.10 per gallon, which increase was 
to be levied and collected upon all spirits in bond at the time of 
the passage of the Act or thereafter manufactured. This pro- 
vision differed from previous legislation, in that the new rate 
was payable upon all spirits in bond rather than upon future 
production only. But, despite this provision, the gains which 
accrued to speculators were enormous, for it was evident as 

1 Taxation in the United States, 252-254. 



792 SELECTED READINGS IN PUBLIC FINANCE 

early as June that the tax would be increased. As a consequence 
production was very active during this period, and speculators 
and distillers withdrew spirits in great quantities in order to 
anticipate the increase of the rate. During the months of July 
and August, 1894, 26,500,000 gallons more of spirits were with- 
drawn from the bonded warehouses than during the same months 
of 1893; while the total withdrawals during the two months 
previous to Sept. i, 1894, were 36,554,088. Upon these with- 
drawals the old rate of 90 cents per gallon was paid, with the 
idea of holding the product until the new duty went into effect, 
when the stock would be disposed of upon the basis of the new 
rate. Assuming that the advantage which accrued upon with- 
drawals during the months previous to July offset any overesti- 
mate, the gains to distillers and speculators could not have been 
less than ;^7,ooo,ooo, all of which should have been saved to 
the treasury. 

The measure further provided for an extension of the bonded 
period from three to eight years. In the past it has been the 
custom to collect the tax on tobacco, as well as the customs 
duties, when the commodity entered the market for consump- 
tion ; but the principle has never been applied to spirits. The 
distiller has not only been required to pay the highest rate of 
tax imposed upon any product under the laws, but has been 
compelled to pay the same within a specified time, no matter 
what the demand for spirits or the condition of the market. 
This provision was frequently a cause of great hardship ; and 
while an unlimited bonded period is not granted under the 
present law, as is permitted in tobacco and malt Hquors, it has 
been extended to eight years, a provision which affords great 
relief to producers. How burdensome the former law was is 
shown by the large number of failures which occurred among 
distillers and holders of stock during the early days of the 
recent commercial depression. 

From this increase of the rate to ^i. 10 a gallon, an annual gain 
of twenty millions of dollars is anticipated to the revenues. 

83. The War Taxes of 1898. — In order to defray part of the 
expenses of the Spanish War, new internal taxes were estabUshed 
in 1898 and some of the existing duties were increased. Sub- 



THE INTERNAL REVENUE SYSTEM 793 

sequently all of these duties were repealed. The following 
account of the war taxes has been given by Professor C. C. 
Plehn : ^ 

The United States government has never resorted to internal 
taxes except to pay the expenses of war, and with the single 
exception of the Mexican War, we have waged no war without 
the use of internal taxes. The first system of "internal revenue 
taxes," as we have learned to call them, was arranged by Ham- 
ilton, 1 791, in the face of the most bitter opposition. An 
excise was declared to be '' the horror of all free states " and 
" hostile to the liberties of the people." On account of the 
general hostility to that form of taxation — a hostility which led 
to armed resistance in the " Whiskey Rebellion " — the law was 
but feebly enforced. It was dubbed by Jefferson an " infernal 
system," and finally came to an end in 1802. To meet the 
expenses of the War of 1 812 Congress again, reluctantly, resorted 
to internal taxation, but the taxes then introduced were never sat- 
isfactory and were hastily abandoned in 181 7. From that time 
to the outbreak of the Civil War no internal taxes were levied 
for the support of the federal government. 

The entire absence of any internal taxes and of any elastic 
element in the tax system at the outbreak of the Civil War added 
greatly to the difficulties involved in raising the revenues needed. 
Beginning in 1862, a vast and complex system of internal tax- 
ation was built up. Of this comprehensive system an acute 
French observer said : " The citizen of the Union pays a tax every 
hour of the day, either directly or indirectly, for every act of 
life; on his personal and real property; on his receipts and in 
his expenses; on his business and on his pleasures."^ 

The heavy expenses of the war debt necessitated the retention 
of many of these taxes even after the close of the war. As the 
years passed by, however, the most burdensome ones were 
removed. Still a sufficient number of important internal revenue 
taxes were permanently retained to yield about ^150,000,000 a 

1 The Finances of the United States in the Spanish War, 434 et seq. Reprinted, 
with consent of author, from The University Chronicle of the University of CaUfornia. 
Vol. I (1898). 

2 E. Duvergier de Hauranne, Revue des deux mondes, Aug. 15, 1865. 



794 SELECTED READINGS IN PUBLIC FINANCE 

year. The continuance of these taxes in time of peace proved 
of great advantage when war broke out. That advantage was 
that they provided the administrative organization necessary for 
the collection of increased revenues. New taxes to be admin- 
istered by the same machinery could be easily imposed and made 
remunerative within a very short time. Indeed there is almost 
no precedent in financial history for the immediate returns these 
new taxes yielded. The income from them during the very first 
month was over ^12,000,000. 

For the reasons explained in the last lecture, it was decided to 
raise the larger part of the revenue needed for the war by en- 
larging the existing system of internal taxes. The taxes of this 
kind in use were of three principal classes : (i) the group on 
spirits, yielding, in 1897, ^82,008,543 ; (2) the group on tobacco, 
yielding ^30,710,297 ; (3) the group on fermented liquors, yield- 
ing $32,472,162. The war revenue bill doubled the rates in two 
of these groups and rehabilitated a large number of the taxes 
used during the Civil War. The principles which guided the 
selection of the different taxes were stated by Mr. Dingley when 
explaining the bill to the house as follows : 

" These taxes have been selected, first, because we have the 
machinery for the collection of them now, and they can be col- 
lected with but slight additions to the force and with but slight 
increase of expense. We have selected them also because they 
were a source of revenue successfully seized upon during the 
Civil War, and because they are taxes either upon articles of 
voluntary consumption or upon objects where the tax will be 
paid by those who are ordinarily able to pay them ; and we have 
refrained from putting a tax in a direction where it would be 
purely upon consumption, unless the consumption was of an 
article of voluntary consumption, so that the consumer might 
regulate his own tax, following what is the accepted rule of tax- 
ation in all countries, with a view of imposing the least burden 
and disturbing the business of the country as little as possible." 

Briefly summarized the aim of the bill was to obtain the money 
needed as quickly as possible. The question of the equal dis- 
tribution of the burden among the people was not raised. The 
revenue bill was strictly an emergency measure. Although the 
senators showed a tendency to spin fine theories in regard to 



THE INTERNAL REVENUE SYSTEM 795 

the operation of certain taxes, yet the equality of the system as 
a whole was not considered. Senator Allison said of it : 

" In the first place, this bill is here only because the govern- 
ment of the United States is involved in a war with a foreign 
country. If there were no war, there would be no necessity for 
this bill ; and therefore it may be truly called, what it is denom- 
inated, a war measure." 

It is not perhaps surprising, then, that the bill which was 
framed in this spirit contains a heterogeneous collection of taxes. 
It does not cull the fruit systematically from the orchard of 
industry, but plucks only a part of that which is most easily 
reached. The bill does not establish a system of taxation, but 
a group of taxes which absolutely defies classification. 

We may study the war revenue bill under the following divi- 
sions : (i) Taxes already in use, the rates of which have been 
raised. (2) New excise taxes. (3) New business and corpora- 
tion taxes. (4) Transaction taxes and business taxes in the form 
of stamp taxes on business documents. (5) Miscellaneous 
taxes. 

Of the three groups of internal taxes in use at the time the 
internal revenue bill was presented, one, namely, that consisting 
of taxes on spirits, v/as left untouched. The rates imposed on 
the other two were doubled with the exception that the special 
taxes on dealers in beer and on brewers were left unchanged.^ . 

The tax imposed on dealers in tobacco prior to 1890 was 
restored. The restoration of the tax on dealers in tobacco was 
regarded partly as a measure to enable the officers better to 
enforce the law in regard to the taxation of tobacco and cigars. 
No explanation was advanced during the discussion of the bill 
in Congress for not raising the rates on spirits. Had that class 
of goods been treated as beer and tobacco were treated, no other 
taxes would have been necessary. With the improved methods 
of administration now in use there could be no reason to fear 
the wholesale evasions which vitiated the attempt to levy high 
rates upon spirits during the Civil War. If, as was suggested in 
the last lecture, tea and coffee had both been made to contribute, 

^ Tax on beer, ale, and porter, increased from ^i to $2 a barrel, discount 7^ 
per cent,. Tax on tobacco and snuff, 12 cents a pound; cigars and cigarettes, over 
three pounds per 1000, ^3.60 per looo; of less weight, cigars, ^i, cigarettes, ^1.50. 



796 SELECTED READINGS IN PUBLIC FINANCE 

and, as now suggested, spirits had been treated as beer and 
tobacco were, we should have had ample revenues with the least 
possible additional cost The amounts would have been : 



Tea . 
Coffee 
Spirits 
Beer . 
Tobacco' 



Total 



^10,000,000 
70,000,000 
80,000,000 
30,000,000 
30,000,000 

^220,000,000 



This is $70,000,000 more than the new taxes which were im- 
posed yield, so that the additional rates need have been but two 
thirds of the increase suggested. Indeed, an increase of half 
the amount suggested in the taxes on tea, coffee, spirits, beer, 
and tobacco would have furnished over $100,000,000, or more 
than the amount which the Llouse Committee on Ways and 
Means thought necessary to raise by taxation. It is needless 
to say that such taxation would have been very much more easily 
borne by the people than the multitude of new taxes imposed. 
Had that plan been followed, there would have been few of us 
who would know by actual experience that we were paying the 
expenses of a war. 

New excise taxes to be collected by the use of stamps were 
imposed on patent and proprietary medicines and toilet articles, 
on chewing gum, and on wine.^ 

Little can be said in favor of these taxes ; they strike a vast 
variety of different articles of consumption and their effect is 
anything but uniform. Consumption is a very poor basis for 
taxation. The rates are so moderate, however, that there is 
little temptation to shift the taxes and the articles taxed are in 

1 Medicines and toilet articles. 

Retail Price of Packages Stamps 

I to 5 cents . o OB 9 c ol^ofi cent 

5 to 10 cents , , , 8 s o , J of I cent 

10 to 15 cents c , , , e «. c I of I cent 

15 to 25 cents f of I cent 

For each additional 25 cents . . , , f of i cent 

Chewing gum, 4 cents for each package of not more tha-i ^i in retail price and 
4 cents for each additional ^i in retail price, or fraction thereof. 

Wine per bottle of one pint or less, i cent; per bottle of over one pint, 2 cents. 



THE INTERNAL REVENUE SYSTEM 797 

many instances monopoly products, the prices of which, it may 
be assumed, are ah'eady as high as they can be made without 
decreasing the sales. In some instances, therefore, these are 
not taxes on consumption but taxes on the profits of monopoly 
businesses. There has, indeed, been no general tendency to 
increase the prices of these articles. To be sure the imposition 
of the tax has checked the tendency to cut rates and to that 
extent may be said to have raised the prices of some articles 
widely regarded as necessities, but that effect will be only tem- 
porary. While, therefore, these new excise taxes have not 
added a very desirable element to our tax system, they are not 
seriously harmful. 

The new business taxes are of two classes. The first are 
those laid on bankers, brokers, museums and concert halls, 
circuses and other public exhibitions, bowling alleys and bil- 
liard and pool rooms.^ The second are those on refiners of 
petroleum and sugar and on pipe-line companies. 

In the first of these classes the most serious difficulties that 
have arisen are clearly revealed in connection with the applica- 
tion of the law to foreign banks. The law makes no special 
provision for them and they do not come properly under the 
general provisions. Strictly speaking a branch of a foreign 
bank doing business in this country has no capital located here. 
Such banks would, therefore, pay but $50, the minimum tax 
which all bankers must pay. But as these houses often do 
a vast business such a tax would be obviously unfair. The 
law of 1864 which was partly copied in the new law was 
much more explicit. It provided a method for determining 
the capital of branch banks. The total capital of the bank 
was to be apportioned among the different branches according 
to the amount of the business done by each. This method was 
applied to foreign banks. That old law, however, laid a tax on 
deposits, dividends, and profits as well as upon capital, so that 
the burden fell with greater equality upon all the banks. 
While the inequality of this tax is best revealed by the difficulty 

1 Bankers, ^50 a year and $2 for each $1000 over ^25,000 of capital; brokers, ^50; 
pawnbrokers and commercial brokers, $20; custom-house brokers, $10; theaters, 
etc., ^100; circuses, $100 for each state in which they do business; bowling alleys, 
etc., $5 for each alley or table. 



798 SELECTED READINGS IN PUBLIC FINANCE 

of applying the law to foreign banks, it also arises in every 
other case. The amount of capital used is never commensu- 
rate with the business done, nor with the ability of the bank 
to contribute. There are, for example, fifteen commercial 
banks in San Francisco. In one of these the capital is 19 per 
cent of the business being done, as measured by the total assets 
and liabilities ; in another it is 79 per cent. Although the total 
assets and habilities are only an approximate measure of the 
bank's ability to pay, yet this comparison shows that the new 
tax is many times as heavy on the second bank as on the first. 
Generally speaking, the smaller the bank, the heavier this tax 
is likely to be. The same inequality pervades the other special 
business taxes. A small theater or a small circus pays the 
same tax as a large one. Probably some of the smaller ones 
will be driven out of business. Possibly, however, this is not 
a result to be deplored. This whole group of taxes seems to 
have been snatched indiscriminately from the system of internal 
taxes developed during the Civil War. The old system was by 
Ho means a complete or a just one, and the scattered sections 
adopted in the new law form far less of a system. 

The tax on refiners of petroleum or sugar and on pipe-line 
companies which was placed at a quarter of one per cent on the 
excess of gross receipts above ^250,000 a year is the remnant of 
a tax on the gross receipts of nearly all corporations which was 
proposed by the majority of the Senate Committee on Finance. 
The minority of that committee, however, objected to such a 
sweeping tax, first, on the ground that it would burden many 
commodities several times over, and second, on the ground that 
many corporations, and especially the smaller ones, had to com- 
pete with unincorporated business houses and firms, and that 
the latter would be given an advantage. It was urged during 
the discussion that the tendency to form corporations was a 
public calamity, and should be checked by this form of taxation. 
A tax on the gross receipts of railroads, bridges, canals, express 
companies, ferries, lotteries, ships, barges, stages, steamboats, 
and telegraph and insurance companies had been used with great 
success during the Civil War. It was proposed to renew this 
tax and to extend it to all corporations in spite of the fact 
that many of them were heavily taxed by other parts of the law. 



THE INTERNAL REVENUE SYSTEM 799 

There were very large elements of injustice in the proposed tax, 
and the only argument advanced in favor of retaining the tax 
on the oil and sugar trust was that they were monopolies. 
The tax is not severe. It will not be above one and a quarter 
cents per hundred pounds of sugar nor above one and a half 
cents per hundred gallons of oil at the prevailing wholesale rates, 
so that there will be little temptation to shift the tax even if 
the companies would not lose more by reduced sales from an 
attempt to raise prices than they would gain by shifting the tax. 
There is little likelihood that the tax will affect retail prices. 

A very large number of transaction taxes and of business 
taxes was levied in the form of stamp taxes on business docu- 
ments and on the means of communication. These taxes are 
usually known as stamp taxes, but the name indicates merely 
the means of collection and shows nothing of the nature of the 
tax. In general these taxes are based upon recognition of the 
fact that when wealth is transferred from one person to another, 
its existence is manifested and a convenient moment occurs for 
the imposition of a tax. When such a transfer is accompanied 
by a document which is legal evidence of the title of the new 
owner, it is easy for the government to refuse legal recognition 
to such a document unless accompanied by the evidence that 
the tax has been paid. It is, therefore, practically impossible to 
evade such a tax. The most convenient way of collecting these 
taxes is by the sale of stamps which are to be attached to the 
documents as evidence of payment. There are two features of 
these taxes which commend them as emergency taxes. In the 
first place, even at a low rate they can be made to yield a con- 
siderable income, and the return is a quick one, as large the 
first month as at any time afterward. In the second place 
they are very inexpensive to administer: the taxpayer himself 
acts as tax collector and when he goes to the office to purchase 
the stamps, brings in the revenue. He cannot omit to pay his 
tax lest his document prove illegal. During the Civil War and 
for many years afterward stamp taxes of this sort were in use. 
Many of the provisions of the old law were transferred to the 
new law, and the changes and omissions are rarely for the 
better. 

It would be tedious to enumerate all the transactions which 



8oo SELECTED READINGS IN PUBLIC FINANCE 

are taxed in this way, nor is it necessary, as I can comment on 
but few of them. The first thing that strikes one who carefully 
scans the long schedules of these taxes is that they are fright- 
fully unequal. Only here and there are they graded according 
to the value of the thing taxed. Thus the tax on the issue of 
corporation stocks is five cents on each $ioo of the par value, 
and on the transfer of the stock is two cents on each $ioo of the 
par value. But the par value of a stock is a perfectly arbitrary 
thing, a mere name. It is usually $ioo, but the true value may 
be anywhere from one cent to $1000 or over, according to the 
success of the enterprise. So, too, with checks and drafts ; 
whatever the value may be, the tax is always two cents. Indeed, 
in this particular case the form of the tax defeats its end as a 
revenue measure, for it has simply resulted in the writing of 
fewer and of larger checks, and more has been lost to the postal 
revenues through less frequent remittances than has been gained 
from the tax on checks. 

All of that part of the law which deals with drafts and bills 
of exchange is so faultily drawn as to be practically unintelligible. 
The technical terms of banking are used in strange and unusual 
senses, and totally incongruous things, such, for example, as 
inland bills of exchange and certificates of deposit bearing inter- 
est are grouped together. These provisions should have been 
drawn by a practical banker. Had the new tax law not been 
supported by that patriotic sentiment which so largely aided its 
enforcement, this particular part of the law would have given 
rise to more lawsuits than revenue. 

Included under the stamp taxes are certain taxes directed more 
or less vaguely at certain classes of corporations. These are 
the taxes on freight bills, express receipts, parlor and sleeping 
car tickets, telegrams and telephone messages, and passage 
tickets to foreign countries. The rates on the last are graded 
according to value, but on all the others are uniform at one cent 
each, except that no tax falls on telephone messages below fif- 
teen cents. ■ The tax on telephone messages is not collected by 
stamps. It is easy to see that this is a most unequal system. 
There has been much discussion as to whether it was the inten- 
tion of the law that the stamp should be furnished by the com- 
panies or by their patrons. This is really a matter of little 



THE INTERNAL REVENUE SYSTEM 8oi 

moment. In some cases the tax is so slight as to be entirely 
immaterial. In such cases the companies have furnished the 
stamps themselves to save their patrons any annoyance, and 
have not changed their rates. In other cases the tax is so 
severe that if the companies furnish the stamps, they will be 
obliged to shift the tax by raising their rates, in order to live. 
If the tax were paid by the express companies, it would vary 
from 4 per cent of the gross receipts down to practically 
nothing. For doing a twenty-five-cent errand the express com- 
pany would pay one cent, and no more for a shipment of 
$1,000,000 in gold. The express companies have asserted that 
if they have to pay the tax, it will take half of their profits. 
The tax is also very severe on telegrams. The average telegram, 
it has been estimated, costs 24.3 cents and the average profit is 
six cents, of which the tax is i6|- per cent. Whatever may have 
been the intention of the law as to who should furnish the stamp 
in such cases, it is clear that the tax will be shifted to the patron 
of the company. If it is finally decided that the company must 
furnish the stamp, then the rates will have to be raised, and the 
patron will have to pay the tax just as much as if he furnished 
the stamp himself. Taxes which appropriate for the use of the 
government from 10 per cent to 50 per cent of the net profits 
of any business are bound to be shifted. Still the companies 
cannot escape considerable loss even by shifting the tax. If 
they raise the rates in order to cover the tax, their business will 
fall off, while the expense of doing it will not decrease in like 
measure. If they could raise their rates without loss of business, 
there is every reason to suppose they would do so, tax or no- 
tax. On the other hand the public is the loser as well as the 
companies. In the first place it is obliged to pay the tax, or 
at least a part of it, and in the second place it is obhged by the 
increased cost to curtail its use of the facilities which the com- 
panies furnish. When taxation approaches confiscation, it 
strikes directly at the welfare of the whole people. 

******* 

Among the miscellaneous taxes there was also inserted one 
upon mixed or adulterated flour. The imposition of this tax is 
not mainly for revenue. It is for the purpose of regulation and 
to protect the public from unknowingly using inferior flour. On 



8o2 SELECTED READINGS IN PUBLIC FINANCE 

oleomargarine there is a similar tax that has been in use for 
some time. It was asserted in Congress that as much as 75 or 
80 per cent of all flour sold is adulterated by the use of ground 
clay, ground rock, ** mineraline," or corn flour bleached by sul- 
phuric acid. It is not claimed that all of the articles used for the 
adulteration of flour are injurious to health, but some of them 
are, and none of them has the same value for nutrition as wheat 
flour. The law requires these flours to be properly labeled, and 
by imposing a stamp tax on them the government can enforce 
this regulation. Without such a tax the federal government 
would not be competent to invade this sphere of state activities. 
A number of penalties are imposed for failure to comply with 
all the regulations. From now on it will be dangerous for any 
person to sell mixed flour under the guise of pure flour. 

The general system of taxation imposed by this law is not 
particularly burdensome as a whole. In some instances indi- 
vidual parts of the system run very close to confiscation, and the 
system is frightfully unequal. At the same time most of the un- 
equal taxes can be wholly or partly shifted and the severity of the 
burden is thus hghtened by diffusion. The inequality and injus- 
tice of the system which we have noted all through the law is, 
perhaps, a necessary feature of any system that is adopted in 
an emergency, when the time is lacking for the full discussion 
of a logical and just system. It emphasizes the necessity, so 
often referred to, of arranging in time of peace a just and equi- 
table system which can be readily expanded in time of war. 
During a war no nation can afford the luxury of tax reform for 
reform's sake. That is an enjoyment which belongs to times 
of peace.i 

1 Statistics showing the productivity of the various internal taxes at different times 
are given in the Appendix, — Ed. 



CHAPTER XXII 

THE EARLY DEVELOPMENT OF PUBLIC BORROWING 

84. The Views of David Hume. — In 1752, at a time when 
the rapid growth of public debts was alarming many persons, 
David Hume published his celebrated Essay on Public Credit.^ 
In this essay he draws the following unfavorable contrast be- 
tween the practice of public borrowing and the earlier policy 
of accumulating state treasures in order to meet unusual 
emergencies : 

It appears to have been the common practice of antiquity, to 
make provision, during peace, for the necessities of war, and to 
hoard up treasures beforehand as the instruments either of 
conquest or defence ; without trusting to extraordinary imposi- 
tions, much less to borrowing, in times of disorder and con- 
fusion.2 Besides the immense sums above mentioned, which 
were amassed by Athens, and by the Ptolemies, and other suc- 
cessors of Alexander; we learn from Plato, that the frugal 
Lacedemonians had also collected a great treasure ; and Arrian 
and Plutarch take notice of the riches which Alexander got 
possession of on the conquest of Susa and Ecbatana, and which 
were reserved, some of them, from the time of Cyrus. If I 
remember right, the scripture also mentions the treasure of 
Hezekiah and the Jewish princes; as profane history does that 

1 In his Political Discourses, (1752). 

2 The earliest writers on finance believed that a prince should thus accumulate 
treasure. Bodin, for instance, after treating of public revenues and expenditures, 
devoted the remainder of the chapter to " the reserve that should be accumulated 
for time of need." The German cameralists strongly advocated this policy. In 
England, also, state treasures were advocated by such a writer as Thomas Mun, who 
declared that " a Prince that will not oppress his people, and yet be able to maintain 
his Estate and his Right, that will not run himself into Poverty, Contempt, Hate, and 
Danger, must lay up treasure, and be thrifty." . . . England's Treasure by Foreign 
Trade, ch. 17. (Published 1664; written prior to 1641.) — Ed. 

803 



8o4 SELECTED READINGS IN PUBLIC FINANCE 

of Philip and Perseus, kings of Macedon. The ancient republics 
of Gaul had commonly large sums in reserve. Every one knows 
the treasure seized in Rome by Julius Caesar, during the civil 
wars : and we find afterward, that the wiser emperors, Augus- 
tus, Tiberius, Vespasian, Severus, etc., always discovered the 
prudent foresight, of having great sums against any pubHc 
exigency. 

On the contrary, our modern expedient, which has become 
very general, is to mortgage the public revenues, and to trust 
that posterity will pay off the incumbrances contracted by their 
ancestors : And they, having before their eyes, so good an ex- 
ample of their wise fathers, have the same prudent reliance on 
their posterity ; who, at last, from necessity more than choice, 
are obliged to place the same confidence in a new posterity. 
But not to waste time in declaiming against a practice which 
appears ruinous, beyond all controversy ; it seems pretty ap- 
parent, tliat the ancient maxims are, in this respect, more pru- 
dent than the modern; even though the latter had been confined 
within some reasonable bounds, and had ever, in any instance, 
been attended with such frugality, in time of peace, as to dis- 
charge the debts incurred by an expensive war. For why should 
the case be so different between the public and an individual, 
as to make us establish different maxims of conduct for each } 
If the funds of the former be greater, if its resources be more 
numerous, they are not infinite ; and as its frame should be 
calculated for a much longer duration than the date of a single 
life, or even of a family, it should embrace maxims, large, dur- 
able, and generous, agreeably to the supposed extent of its 
existence. To trust to chances and temporary expedients, is, 
indeed, what the necessity of human affairs frequently renders 
unavoidable ; but whoever voluntarily depend upon such re- 
sources, have not necessity, but their own folly, to accuse for 
their misfortunes, when any such befall them. 

If the abuses of treasures be dangerous, either by engaging 
the state in rash enterprises, or making it neglect military dis- 
cipline, in confidence of its riches; the abuses of mortgaging 
are more certain and inevitable ; poverty, impotence, and sub- 
jection to foreign powers. 

According to modern policy war is attended with every de- 



EARLY DEVELOPMENT OF PUBLIC BORROWING 805 

structive circumstance ; loss of men, increase of taxes, decay of 
commerce, dissipation of money, devastation by sea and land. 
According to ancient maxims, the opening of the public treasure, 
as it produced an uncommon affluence of gold and silver, served 
as a temporary encouragement to industry, and atoned, in some 
degree, for the inevitable calamities of war. 

It is very tempting to a minister to employ such an expedient, 
as enables him to make a great figure during his administration, 
without overburthening the people with taxes, or exciting any 
immediate clamors against himself. The practice, therefore, 
of contracting debt will almost infallibly be abused, in every 
government. It would scarcely be more imprudent to give a 
prodigal son a credit in every banker's shop in London, than to 
empower a statesman to draw bills, in this manner, upon 
posterity. 

85. The Views of Adam Smith. — Twenty-four years later, 
Adam Smith discussed at greater length the development of 
public debts. After explaining that a disposition " to save and 
to hoard " prevailed in earlier times before the growth of exten- 
sive manufactures and commerce, he said : ^ 

Among nations to whom commerce and manufactures are 
little known, the sovereign, it has been observed in the fourth 
book, is in a situation which naturally disposes him to the par- 
simony requisite for accumulation. In that situation the ex- 
pense even of a sovereign cannot be directed by that vanity 
which delights in the gaudy finery of a court. The ignorance 
of the times affords but few of the trinkets in which that finery 
consists. Standing armies are not then necessary, so that the 
expense even of a sovereign, like that of any other great lord, 
can be employed in scarce anything but bounty to his tenants, 
and hospitality to his retainers. But bounty and hospitality 
very seldom lead to extravagance ; though vanity almost always 
does. All the ancient sovereigns of Europe, accordingly, had 
treasures. Every Tartar chief in the present times is said to 
have one. 

In a commercial country abounding with every sort of expen- 

1 Wealth of Nations, Bk. V, ch. 3. 



8o6 SELECTED READINGS IN PUBLIC FINANCE 

sive luxury, the sovereign, in the same manner as almost all the 
great proprietors in his dominions, naturally spends a great part 
of his revenue in purchasing those luxuries. His own and the 
neighboring countries supply him abundantly with all the 
costly trinkets which compose the splendid but insignificant 
pageantry of a court. . . . How can it be supposed that he 
should be the only rich man in his dominions who is insensible 
to pleasures of this kind ? If he does not, what he is very 
likely to do, spend upon those pleasures so great a part of 
his revenue as to debilitate very much the defensive power 
of the state, it cannot well be expected that he should not 
spend upon them all that part of it which is over and above 
what is necessary for supporting that defensive power. His 
ordinary expense becomes equal to his ordinary revenue, and 
it is well if it does not frequently exceed it. The amassing of 
treasure can no longer be expected, and when extraordinary 
exigencies require extraordinary expenses, he must necessarily 
call upon his subjects for an extraordinary aid. The present 
and the late king of Prussia are the only great princes of 
Europe who, since the death of Henry IV of France, in 1610, 
are supposed to have amassed any considerable treasure.-^ The 
parsimony which leads to accumulation has become almost as 
rare in republican as in monarchical governments. The Italian 
republics, the United Provinces of the Netherlands, are all in 
debt The canton of Berne is the single republic in Europe 
which has amassed any considerable treasure. The other Swiss 
republics have not. The taste for some sort of pageantry, for 
splendid buildings, at least, and other public ornaments, fre- 
quently prevails as much in the apparently sober senate house 
of a little republic as in the dissipated court of the greatest 
king. 

The want of parsimony in time of peace, imposes the neces- 
sity of contracting debt in time of war. When war comes, there 
is no money in the treasury but what is necessary for carrying 

1 Frederick William I, by persistent economy, had accumulated at the end of his 
reign a treasure of 8,700,000 thalers, besides plate worth 1,500,000 thalers. This 
treasure defrayed the greater part of the extraordinary expeise of Frederick the 
Great's Silesian wars. In time of peace, Frederick, like his father, amassed a con- 
siderable treasure^, which at his death amounted to 55,000,000 thalers. — Ed. 



EARLY DEVELOPMENT OF PUBLIC BORROWING 807 

on the ordinary expense of the peace establishment. In war an 
establishment of three or four times that expense becomes 
necessary for the defense of the state, and consequently a reve- 
nue three or four times greater than the peace revenue. Suppos- 
ing that the sovereign should have, what he scarce ever has, the 
immediate means of augmenting his revenue in proportion to the 
augmentation of his expense, yet still the produce of the 1:axes, 
from which this increase of revenue must be drawn, will not 
begin to come into the treasury till perhaps ten or twelve 
months after they are imposed. But the moment in which war 
begins, or rather the moment in which it appears Hkely to 
begin, the army must be augmented, the fleet must be fitted out, 
the garrisoned towns must be put into a posture of defense ; that 
army, that fleet, those garrisoned towns, must be furnished with 
arms, ammunition, and provisions. An immediate and great 
expense must be incurred in that moment of immediate danger, 
which will not wait for the gradual and slow returns of the new 
taxes. In this exigency government can have no other resource 
but in borrowing. 

The same commercial state of society which, by the operation 
of moral causes, brings government in this manner into the 
necessity of borrowing, produces in the subjects both an ability 
and an inclination to lend. If it commonly brings along with it 
the necessity of borrowing, it likewise brings with it the facility 
of doing so. 

A country abounding with merchants and manufacturers, 
necessarily abounds with a set of people through whose hands 
not only their own capitals, but the capitals of all those who 
either lend them money, or trust them with goods, pass as fre- 
quently, or more frequently, than the revenue of a private man, 
who, without trade or business, lives upon his income, passes 
through his hands. The revenue of such a man can regularly 
pass through his hands only once in a year. But the whole 
amount of the capital and credit of a merchant, who deals in a 
trade of which the returns are very quick, may sometimes pass 
through his hands two, three, or four times in a year. A coun- 
try abounding with merchants and manufacturers, therefore, 
necessarily abounds with a set of people who have it at all times 
in their power to advance, if they choose to do so, a very large 



8o8 SELECTED READINGS IN PUBLIC FINANCE 

sum of money to government. Hence the ability in the subjects 
of a commercial state to lend. 

Commerce and manufactures can seldom flourish long in any 
state which does not enjoy a regular administration of justice, in 
which the people do not feel themselves secure in the possession 
of their property, in which the faith of contracts is not supported 
by laV, and in which the authority of the state is not supposed 
to be regularly employed in enforcing the payment of debts from 
all those who are able to pay. Commerce and manufactures, in 
short, can seldom flourish in any state in which there is not a 
certain degree of confidence in the justice of government. The 
same confidence which disposes great merchants and manufac- 
turers, upon ordinary occasions, to trust their property to the 
protection of a particular government, disposes them, upon ex- 
traordinary occasions, to trust that government^ with the use of 
their property. By lending money to government, they do not 
even for a moment diminish their ability to carry on their trade 
and manufactures. On the contrary, they commonly augment 
it. The necessities of the state render government upon most 
occasions willing to borrow upon terms extremely advantageous 
to the lender. The security which it grants to the original 
creditor, is made transferable to any other creditor, and, from 
the universal confidence in the justice of the state, generally 
sells in the market for more than was originally paid for it. 
The merchant or moneyed man makes money by lending money 
to government, and instead of diminishing, increases his trading 
capital. He generally considers it as a favor, therefore, when 
the administration admits him to a share in the first subscription 
for a new loan. Hence the inclination or willingness in the 
subjects of a commercial state to lend. 

The government of such a state is very apt to repose itself 
upon this ability and wiUingness of its subjects to lend it their 
money on extraordinary occasions. It foresees the facility of 
borrowing, and therefore dispenses itself from the duty of saving. 

In a rude state of society there are no great mercantile or 

1 To this it may be added that, with the development of democratic government, 
the capitalists lend to a government which is under the coTitrol — to a very large 
extent, at least — of the propertied classes. Cf. H. C. Adams, Public Debts, 9 (New 
York, 1887). — Ed. 



EARLY DEVELOPMENT OF PUBLIC BORROWING 809 

manufacturing capitals. The individuals who hoard whatever 
money they can save, and who conceal their hoard, do so from 
a distrust of the justice of government, from a fear that if it was 
known they had a hoard, and where that hoard was to be found, 
they would quickly be plundered. In such a state of things few 
people would be able, and nobody would be willing, to lend their 
money to government on extraordinary exigencies. The sover- 
eign feels that he must provide for such exigencies by saving, 
because he foresees the absolute impossibility of borrowing. 
This foresight increases still further his natural disposition to 
save. 

The progress of the enormous debts which at present oppress, 
and will in the long run probably ruin,^ all the great nations of 
Europe, has been pretty uniform. Nations, like private men, 
have generally begun to borrow upon what may be called per- 
sonal credit, without assigning or mortgaging any particular fund 
for the payment of the debt ; and when this resource has failed 
them, they have gone on to borrow upon assignments or mort- 
gages of particular funds. 

What is called the unfunded debt of Great Britain is con- 
tracted in the former of those two ways. It consists partly in a 
debt which bears, or is supposed to bear, no interest, and which 
resembles the debts that a private man contracts upon account ; 
and partly in a debt which bears interest, and which resembles 
what a private man contracts upon his bill or promissory note. 
The debts which are due either for extraordinary services, or for 
services either not provided for, or not paid at the time when 
they are performed ; part of the extraordinaries of the army, 
navy, and ordnance, the arrears of subsidies to foreign princes, 
those of seamen's wages, etc., usually constitute a debt of the 
first kind. Navy and exchequer bills, which are issued some- 
times in payment of a part of such debts and sometimes for 
other purposes, constitute a debt of the second kind ; exchequer 
bills bearing interest from the day on which they are issued, and 

1 Such pessimistic views were common in Smith's time. Hume, it will be remem- 
bered, had dismal forebodings; and even prophesied "the natural death of public 
credit," through national bankruptcy. And Montesquieu, after enumerating the 
evils attending public borrowing, said: "These are the disadvantages: I do not 
know of any advantages." &sprit des lois, Bk. XXII, ch. 17. — Ed, 



8io SELECTED READINGS IN PUBLIC FINANCE 

navy bills six months after they are issued. The bank of Eng- 
land, either by voluntarily discounting those bills at their current 
value, or by agreeing with government for certain considerations 
to circulate exchequer bills, that is, to receive them at par, pay- 
ing the interest which happens to be due upon them, keeps 
up their value and facilitates their circulation, and thereby fre- 
quently enables government to contract a very large debt of 
this kind. . . . 

When this resource is exhausted, and it becomes necessary, 
in order to raise money, to assign or mortgage some particular 
branch of the public revenue for the payment of the debt, gov- 
ernment has upon different occasions done this in two different 
ways. Sometimes it has made this assignment or mortgage for 
a short period of time only, a year, or a few years, for example ; 
and sometimes for perpetuity. In the one case, the fund was 
supposed sufficient to pay, within the Hmited time, both princi- 
pal and interest of the money borrowed. In the other, it was 
supposed sufficient to pay the interest only, or a^ perpetual an- 
nuity equivalent to the interest, government being at liberty to 
redeem at any time this annuity, upon paying back the principal 
sum borrowed. When money was raised in the one way, it was 
said to be raised by anticipation ; when in the other, by per- 
petual funding, or, more shortly, by funding.^ 

In Great Britain the annual land and malt taxes are regularly 
anticipated every year, by virtue of a borrowing clause constantly 
inserted into the acts which impose them. The bank of Eng- 
land generally advances at an interest, which since the revolu- 
tion has varied from 8 to 3 per cent, the sums for which 
those taxes are granted, and receives payment as their produce 
gradually comes in. If there is a deficiency, which there always 
is, it is provided for in the suppHes of the ensuing year. The 
only considerable branch of the public revenue which yet re- 
mains unmortgaged is thus regularly spent before it comes in. 

1 Funded debt, therefore, meant originally debt of which the payment of the inter- 
est (and sometimes of the principal) was secured by the pledge of certain taxes or 
other sources of revenue. In time, however, the meaning of the term has changed; 
and it now means usually debt which, by formal agreement, is .o run for a consider- 
able length of time or in perpetuity. See Palgrave, Dictionary of Political Economy 
11, 169. — Ed. 



EARLY DEVELOPMENT OF PUBLIC BORROWING 8il 

Like an improvident spendthrift, whose pressing occasions will 
not allow him to wait for the regular payment of his revenue, 
the state is in the constant practice of borrowing of its own fac- 
tors and agents, and of paying interest for the use of its own 
money. 

In the reign of King WiUiam, and during a great part of that 
of Queen Anne, before we had become so familiar as we are 
now with the practice of perpetual funding, the greater part of 
the new taxes were imposed but for a short period of time (for 
four, five, six, or seven years only), and a great part of the grants 
of every year consisted in loans upon anticipations of the prod- 
uce of those taxes. The produce being frequently insufficient 
for paying within the limited term the principal and interest of 
the money borrowed, deficiencies arose, to make good which it 
became necessary to prolong the term. 

In 1697, by the 8th of William III, c. 20, the deficiencies of 
several taxes were charged upon what was then called the first 
general mortgage or fund, consisting of a prolongation to Aug. 
I, 1706, of several different taxes, which would have expired 
within a shorter term, and of which the produce was accumu- 
lated into one general fund. The deficiencies charged upon this 
prolonged term amounted to ;£ 5, 160,459, ^4^- 9^^- 

(Smith then proceeds to explain how this operation was 
repeated in 1701, 1707, 1708, 1709, 1710, 171 1, 1715, and 1717; 
so that a number of taxes pledged originally for the payment of 
principal and interest of temporary loans were pledged perpetu- 
ally for the payment of the interest of perpetual loans repre- 
senting the principal of temporary loans which had been allowed 
to go unpaid. — Ed.) 

In consequence of those different acts, the greater part of the 
taxes which before had been anticipated only for a short term of 
years, were rendered perpetual as a fund for paying, not the 
capital, but the interest only, of the money which had been bor- 
rowed upon them by different successive anticipations. 

Had money never been raised but by anticipation, the course 
of a few years would have liberated the public revenue, without 



8 12 SELECTED READINGS IN PUBLIC FINANCE 

any other attention of government besides that of not overload- 
ing the fund by charging it with more debt than it could pay 
within the limited term, and of not anticipating a second time 
before the expiration of the first anticipation. But the greater 
part of European governments have been incapable of those 
attentions. They have frequently overloaded the fund even 
upon the first anticipation ; and when this happened not to be 
the case, they have generally taken care to overload it, by antici- 
pating a second and a third time before the expiration of the 
first anticipation. The fund becoming in this manner altogether 
insufficient for paying both principal and interest of the money 
borrowed upon it, it became necessary to charge it with the 
interest only, or a perpetual annuity equal to the interest, and 
such unprovident anticipations necessarily gave birth to the 
more ruinous practice of perpetual funding. But though this 
practice necessarily puts off the liberation of the public revenue 
from a fixed period to one so indefinite that it is not very likely 
ever to arrive ; yet as a greater sum can in all cases be raised 
by this new practice than by the old one of anticipations, the 
former, when men have once become familiar with it, has in the 
great exigencies of the state been universally preferred to the lat- 
ter. To relieve the present exigency is always the object which 
principally interests those immediately concerned in the admin- 
istration of public affairs. The future liberation of the public 
revenue they leave to the care of posterity. 

During the reign of Queen Anne, the market rate of interest 
had fallen from 6 to 5 per cent, and in the twelfth year of her 
reign 5 per cent was declared to be the highest rate which could 
lawfully be taken for money borrowed upon private security. 
Soon after the greater part of the temporary taxes of Great 
Britain had been rendered perpetual, and distributed into the 
Aggregate, South Sea, and General Funds, the creditors of the 
public, like those of private persons, were induced to accept of 
5 per cent for the interest of their money, which occasioned a 
saving of i per cent upon the capital of the greater part of the 
debts which had been thus funded for perpetuity, or of one 
sixth of the greater part of the annuities which were paid out of 
the three great funds above mentioned. This saving left a con- 
siderable surplus in the produce of the different taxes which had 



EARLY DEVELOPMENT OF PUBLIC BORROWING 813 

been accumulated into those funds, over and above what was 
necessary for paying the annuities which were now charged 
upon them, and laid the foundation of what has since been 
called the Sinking Fund. In 171 7, it amounted to ;^323,434, 
js. y^d. In 1727, the interest of the greater part of the public 
debts was still further reduced to 4 per cent; and in 1753 and 
I757> to 3 J and 3 per cent; which reductions still further aug- 
mented the sinking fund.^ 

A sinking fund, though instituted for the payment of old, 
facilitates very much the contracting of new debts. It is a sub- 
sidiary fund always at hand to be mortgaged in aid of any other 
doubtful fund, upon which money is proposed to be raised in 
any exigency of the state. Whether the sinking fund of Great 
Britain has been more frequently applied to the one or to the 
other of those two purposes, will sufficiently appear by and by. 

Besides those two methods of borrowing, by anticipations and 
by perpetual funding, there are two other methods, which hold a 
sort of middle place between them. These are, that of borrow- 
ing upon annuities for terms of years, and that of borrowing 
upon annuities for lives. ^ 

During the reigns of King WiUiam and Queen Anne, large 

1 A sinking fund is a fund formed by the setting apart of annual surpluses, or 
moneys otherwise obtained, with a view to the ultimate application of the fund thus 
accumulated to the payment of public debts previously incurred. Sir Robert Wal- 
pole's sinking fund act of 1716, to which Smith refers, provided that the surplus 
taxes described by Smith, should " be appropriated, reserved, and employed to and 
for discharging the principal and interest of such national debts and incumbrances as 
were incurred before the 25th December, 17 16, . . . and to or for none other use, 
interest, or purpose whatsoever." Cf. Palgrave, Dictionary of Political Economy, III, 
405. — Ed. 

■2 Annuities for terms of years — terminable annuities, as they are called — yield 
the holder interest and an annual installment of the principal of the loan, the pay- 
ments being so computed as to return the entire principal with interest at the 
expiration of a certain term of years. Life annuities provide for payments that con- 
tinue to the end of the annuitant's life. The " perpetual debt," described by Smith 
in the earlier paragraphs, consisted of perpetual annuities, in which the government 
agreed to pay in perpetuity the annual interest on the loan. Such an annuity, how- 
ever, could be canceled by returning the principal, and was not perpetual in the sense 
that it could never be retired. In Europe annuities have been a favorite method of 
borrowing money. In the United States the common method has been the issue of 
bonds which call for the payment of stated interest and the return of the principal 
at a stipulated date. — Ed. 



8 14 SELECTED READINGS IN PUBLIC FINANCE 

sums were frequently borrowed upon annuities for terms of 
years, which were sometimes longer and sometimes shorter. In 
1693, an act was passed for borrowing one million upon an 
annuity of 14 per cent, or of ;£ 140, 000 a year for 16 years. In 
1 69 1, an act was passed for borrowing a million upon annuities 
for lives, upon terms, which in the present times would appear 
very advantageous. But the subscription was not filled up. . . . 
In the reign of Queen Anne, money was upon different occa- 
sions borrowed both upon annuities for lives, and upon annuities 
for terms of .32, of 89, of 98, and of 99 years. In 1719, the 
proprietors of the annuities for 32 years were induced to accept 
in lieu of them South Sea stock to the amount of ii|- years' 
purchase of the annuities, together with an additional quantity 
of stock equal to the arrears which happened then to be due 
upon them. In 1720, the greater part of the other annuities for 
terms of years, both long and short, were subscribed into the 
same fund. . . . 

During the two wars which began in 1739 and in 1755, little 
money was borrowed either upon annuities for terms of years, or 
upon those for lives. An annuity for 98 or 99 years, however, 
is worth nearly as much money as a perpetuity, and should, 
therefore, one might think, be a sum for borrowing nearly as 
much. But those who, in order to make family settlements, and 
to provide for remote futurity, buy into the public stocks, would 
not care to purchase into one of which the value was continually 
diminishing ; and such people make a very considerable propor- 
tion both of the proprietors and purchasers of stock. An an- 
nuity for a long term of years, therefore, though its intrinsic 
value may be very nearly the same with that of a perpetual 
annuity, will not find nearly the same number of purchasers. 
The subscribers to a new loan, who mean generally to sell their 
subscription as soon as possible, prefer greatly a perpetual 
annuity redeemable by parliament, to an irredeemable annuity 
for a long term of years of only equal amount. The value of 
the former may be supposed always the same, or very nearly the 
same ; and it makes, therefore, a more convenient transferable 
stock than the latter. 

During the two last-mentioned wars, annuities, either for 
terms of years or for lives, were seldom granted but as pre- 



EARLY DEVELOPMENT OF PUBLIC BORROWING 815 

miums to the subscribers to a new loan, over and above the 
redeemable annuity or interest upon the credit of which the 
loan was supposed to be made. They were granted, not as 
the proper fund upon which the money was borrowed, but as 
an additional encouragement to the lender. 

Annuities for lives have occasionally been granted in two 
different ways ; either upon separate lives, or upon lots of lives, 
which in French are called Tontines, from the name of their 
inventor.! When annuities are granted upon separate lives, 
the death of every individual annuitant disburthens the public 
revenue so far as it was affected by his annuity. When annui- 
ties are granted upon tontines, the liberation of the public 
revenue does not commence till the death of all the annuitants 
comprehended in one lot, which may sometimes consist of 
twenty or thirty persons, of whom the survivors succeed to 
the annuities of all those who die before them, the last survivor 
succeeding to the annuities of the whole lot. Upon the same 
revenue more money can always be raised by tontines than by 
annuities for separate lives. An annuity, with a right of sur- 
vivorship, is really worth more than an equal annuity for a 
separate life, and from the confidence which every man natur- 
ally has in his own good fortune, the principle upon which is 
founded the success of all lotteries, such an annuity generally 
sells for something more than it is worth. In countries where 
it is usual for government to raise money by granting annuities, 
tontines are upon this account generally preferred to annuities 
for separate lives. The expedient which will raise most money 
is almost always preferred to that which is likely to bring about 
in the speediest manner the liberation of the public revenue. 

In France a much greater proportion of the public debts con- 
sists in annuities for lives than in England. According to a 
memoir presented by the parliament of Bordeaux to the king 
in 1764, the whole public debt of France is estimated at 2400 

1 The inventor was Tonti, an Italian banker, who lived in the seventeenth century., 
A tontine is " an annuity shared by subscribers to a loan, with the benefit of survivor- 
ship, the annuity being increased (to the surviving subscribers) as the subscribers die, 
until at last the whole goes to the last survivor, or to the last two or three," according 
to the terms of the loan. Cf, Palgrave, Dictionary of Political Economy, III, 548, 
— Ed 



8i6 SELECTED READINGS IN PUBLIC FINANCE 

millions of livres ; of which the capital for which annuities for 
lives has been granted, is supposed to amount to 300 millions, 
the eighth part of the whole public debt. The annuities them- 
selves are computed to amount to 30 millions a year, the fourth 
part of 120 milHons, the supposed interest of that whole debt. 
These estimations, I know very well, are not exact, but having 
been presented by so very respectable a body as approximations 
to the truth, they may, I apprehend, be considered as such. It 
is not the different degrees of anxiety in the two governments 
of France and England for the liberation of the public revenue 
which occasions this difference in their respective modes of 
borrowing. It arises altogether from the different views and 
interests of the lenders. 

In England, the seat of government being in the greatest 
mercantile city in the world, the merchants are generally the 
people who advance money to government. But by advancing 
it they do not mean to diminish, but, on the contrary, to increase 
their mercantile capitals ; and unless they expected to sell with 
some profit their share in the subscription for a new loan, they 
never would subscribe. But if by advancing their money they 
were to purchase, instead of perpetual annuities, annuities for 
lives only, whether their own or those of other people, they 
would not always be so likely to sell them with a profit. Annui- 
ties upon their own lives they would always sell with loss ; be- 
cause no man would give for an annuity upon the life of another, 
whose age and state of health are nearly the same with his own, 
the same price which he would give for one upon his own. An 
annuity upon the life of a third person, indeed, is no doubt 
of equal value to the buyer and the seller; but its real value 
begins to diminish from the moment it is granted, and continues 
to do so mare and more as long as it subsists. It can never, 
therefore, make so convenient a transferable stock as a per- 
petual annuity, of which the real value may be supposed always 
the same, or very nearly the same. 

In France, the seat of government not being in a great mer- 
cantile city, merchants do not make so great a proportion of the 
people who advance money to government. The people con- 
cerned in the finances, the farmers-general, the receivers of the 
taxes which are not in farm, the court bankers, etc., make the 



EARLY DEVELOPMENT OF PUBLIC BORROWING 817 

greater part of those who advance their money in all public 
exigencies. Such people are commonly men of mean birth, but 
of great wealth, and frequently of great pride. They are too 
proud to marry their equals, and women of quality disdain to 
marry them. They frequently resolve, therefore, to live bache- 
lors, and having neither any famihes of their own, nor much 
regard for those of their relations, whom they are not always 
very fond of acknowledging, they desire only to live in splendor 
during their own time, and are not unwilling that their fortune 
should end with themselves. The number of rich people 
besides, who are either averse to marry, or whose condition 
of life renders it either improper or inconvenient for them to 
do so, is much greater in France than in England. To such 
people, who have little or no care for posterity, nothing can be 
more convenient than to exchange their capital for a revenue, 
which is to last just as long, and no longer, than they wish it 
to do. 

The ordinary expense of the greater part of modern govern- 
ments in time of peace being equal or nearly equal to their 
ordinary revenue, when war comes, they are both unwilling and 
unable to increase their revenue in proportion to the increase of 
their expense. They are unwilling, for fear of offending the 
people, who, by so great and so sudden an increase of taxes, 
would soon be disgusted with the war ; and they are unable, 
from not well knowing what taxes would be sufficient to pro- 
duce the revenue wanted. The facility of borrowing delivers 
them from the embarrassment which this fear and inability 
would otherwise occasion. By means of borrowing they are 
enabled, with a very moderate increase of taxes, to raise, from 
year to year, money sufficient for carrying on the war, and by 
the practice of perpetual funding, they are enabled, with the 
smallest possible increase of taxes, to raise annually the largest 
possible sum of money. In great empires, the people who live 
in the capital, and in the provinces remote from the scene of 
action, feel, many of them, scarce any inconveniency from the 
war, but enjoy at their ease, the amusement of reading in the 
newspapers the exploits of their own fleets and armies. To 
them this amusement compensates the small difference between 
the taxes which they pay on account of the war, and those which 



8i8 SELECTED READINGS IN PUBLIC FINANCE 

they had been accustomed to pay in time of peace. They are 
commonly dissatisfied with the return of peace, which puts an 
end to their amusement, and to a thousand visionary hopes of 
conquest and national glory, from a longer continuance of the 
war. 

The return of peace, indeed, seldom relieves them from the 
greater part of the taxes imposed during the war. These are 
mortgaged for the interest of the debt contracted in order to 
carry it on. If, over and above paying the interest of this debt, 
and defraying the ordinary expense of government, the old 
revenue, together with the new taxes, produce some surplus rev- 
enue, it may perhaps be converted into a sinking fund for pay- 
ing off the debt. But, in the first place, this sinking fund, even 
supposing it should be applied to no other purpose, is generally 
altogether inadequate for paying, in the course of any period 
during which it can reasonably be expected that peace should 
continue, the whole debt contracted during the war ; and, in the 
second place, this fund is almost always applied to other pur- 
poses. 

The new taxes were imposed for the sole purpose of paying 
the interest of the money borrowed upon them. If they pro- 
duce more, it is generally something which was neither intended 
nor expected, and is, therefore, seldom very considerable. Sink- 
ing funds have generally arisen, not so much from any surplus 
of the taxes which was over and above what was necessary for 
paying the interest or annuity originally charged upon them, as 
from a subsequent reduction of that interest That of Holland, 
in 1655, and that of the Ecclesiastical State, in 1685, were both 
formed in this manner. Hence the usual insufficiency of such 
funds. 

During the most profound peace, various events occur which 
require an extraordinary expense, and government finds it always 
more convenient to defray this expense by misapplying the sink- 
ing fund than by imposing a new tax. Every new tax is imme- 
diately felt more or less by the people. It occasions always some 
murmur, and meets with some opposition. The more taxes may 
have been multiplied, the higher they have been raised upon every 
different subject of taxation ; the more loudly the people complain 
of every new tax, the more difficult it becomes, too, either to find 



EARLY DEVELOPMENT OF PUBLIC BORROWING 819 

out new subjects of taxation, or to raise much higher the taxes 
already imposed upon the old. A momentary suspension of the 
payment of debt is not immediately felt by the people, and occa- 
sions neither murmur nor complaint. To borrow of the sinking 
fund is always an obvious and easy expedient for getting out of 
the present difficulty. The more the public debts may have been 
accumulated, the more necessary it may have become to study to 
reduce them, the more dangerous, the more ruinous it may be to 
misapply any part of the sinking fund ; the less likely is the public 
debt to be reduced to any considerable degree, the more likely, 
the more certainly, is the sinking fund to be misapplied toward 
defraying all the extraordinary expenses which occur in time of 
peace. When a nation is already overburdened with taxes, noth- 
ing but the necessities of a new war, nothing but either the 
animosity of national vengeance, or the anxiety for national 
security, can induce the people to submit, with tolerable pa- 
tience, to a new tax. Hence the usual misapplication of the 
sinking fund. 

In Great Britain, from the time that we had first recourse to 
the ruinous expedient of perpetual funding, the reduction of the 
public debt in time of peace has never borne any proportion to 
its accumulation in time of war. It was in the war which began 
in 1688, and was concluded by the treaty of Ryswick, in 1697, 
that the foundation of the present enormous debt of Great Britain 
was first laid. 

On Dec. 31, 1697, the public debts of Great Britain, funded 
and unfunded, amounted to ^^2 1,5 15,742, 13.$-. S^d. A great 
part of those debts had been contracted upon short anticipa- 
tions, and some part upon annuities for lives ; so that before 
Dec. 31, 1 701, in less than four years, there had partly 
been paid off, and partly reverted to the public, the sum of 
;^5,i2i,04i, i2s. 1^. ; a greater reduction of the public debt than 
has ever since been brought about in so short a period of time. 
The remaining debt amounted only to ;£i6,394,70i, i.$". y^d. 

In the war which began in 1702, and which was concluded by 
the treaty of Utrecht, the public debts were still more accumu- 
lated. On Dec. 31, 17 14, they amounted to ;^5 3,68 1,076, 
5^-. 6^2^. The subscription into the South Sea fund of the short 
and long annuities increased the capital of the public debts, so 



820 SELECTED READINGS IN PUBLIC FINANCE 

that on Dec. 31, 1722, it amounted to ^55,282,978, is. ^^d. 
The reduction of the debt began in 1723, and went on so 
slowly, that on Dec. 31, 1739, during seventeen years of 
profound peace, the whole sum paid off was no more than 
^{^8,328, 354, lys. ii^^d., the capital of the public debt at that 
time amounting to the sum of ;£ 46,954,623, 3^-. 4^^^. 

The Spanish war which began in 1739, and the French war 
which soon followed it, occasioned a further increase of the 
debt, which, on Dec. 31, 1748, after the war had been con- 
cluded by the treaty of Aix la Chapelle, amounted to ^78,293,3 1 3, 
IS, io\d. The most profound peace of seventeen years' contin- 
uance had taken no more than ^8,328,354, lys. ii^^d. from it. 
A war of less than nine years' continuance added ^31,338,689, 
iSs. 6\d. to it. 

During the administration of Mr. Pelham, the interest of the 
public debt was reduced, or at least measures were taken for 
reducing it, from 4 to 3 per cent ; the sinking fund was in- 
creased, and some part of the public debt was paid off. In 
1755, before the breaking out of the late war, the funded debt of 
Great Britain amounted to ;£"72, 289,673. On Jan. 5, 1763, at 
the conclusion of the peace, the funded debt amounted to 
;£i22,6o3,336, 8i-. 2\d. The unfunded debt has been stated at 
;£ 1 3,927, 589, 2s. 2d. But the expense occasioned by the war 
did not end with the conclusion of the peace ; so that though, on 
Jan. 5, 1764, the funded debt was increased (partly by a new 
loan, and partly by funding a part of the unfunded debt) to 
^129,586,789, los. i\d., there still remained (according to the 
very well-informed author of the Considerations on the Trade 
and Finances of Great Britain ) an unfunded debt, which was 
brought to account in that and the following year, of ^9,975,017, 
12.$-. 2^|<^. In 1764, therefore, the public debt of Great Britain, 
funded and unfunded together, amounted, according to this 
author, to ;£ 139, 5 16,807, 2^". 4d. The annuities for lives, too, 
which had been granted as premiums to the subscribers to the 
new loans in 1757, estimated at fourteen years' purchase, were 
valued at ;£472,5oo; and the annuities for long terms of years, 
granted as premiums likewise in 1761 and 1762, estimated at 
27I years' purchase, were valued at ^{^6,826,875. During a 
peace of about seven years' continuance, the prudent and truly 



EARLY DEVELOPMENT OF PUBLIC BORROWING 821 

patriot administration of Mr. Pelham was not able to pay off 
an old debt of six millions. During a war of nearly the same 
continuance, a new debt of more than seventy-five millions was 
contracted. 

On Jan. 5, 1775, the funded debt of Great Britain 
amounted to ^124,996,086, is. 6\d. The unfunded, exclusive 
of a large civil Hst debt, to ^£4,150,236, 3^-. ii\d. Both 
together, to ^129,146,322, ^s. 6d. According to this account, 
the whole debt paid off during eleven years' profound peace 
amounted only to ^10,415,474, i6i-. 9|^. Even this small reduc- 
tion of debt, however, has not been all made from the savings 
out of the ordinary revenue of the state. Several extraneous 
sums, altogether independent of that ordinary revenue, have 
contributed toward it. . . . The debt, therefore, which since 
the peace has been paid out of the savings from the ordinary 
revenue of the state, has not, one year with another, amounted 
to half a milHon a year. The sinking fund has, no doubt, been 
considerably augmented since the peace, by the debt which has 
been paid off, by the reduction of the redeemable four per 
cents to three per cents, and by the annuities for lives which 
have fallen in ; and, if peace were to continue, a million, per- 
haps, might now be annually spared out of it toward the dis- 
charge of the debt. Another million, accordingly, was paid in 
the course of last year ; but at the same time, a large civil list 
debt was left unpaid, and we are now involved in a new war, 
which in its progress, may prove as expensive as any of our 
former wars.^ The new debt, which will probably be contracted 
before the end of the next campaign, may perhaps be nearly 
equal to all the old debt which had been paid off from the savings 
out of the ordinary revenue of the state. It would be altogether 
chimerical, therefore, to expect that the public debt should ever 
be completely discharged by any savings which are likely to be 
made from that ordinary revenue as it stands at present. 

^ It has proved more expensive than any of our former wars; and has involved us 
in an additional debt of more than 100 millions. During a profound peace of eleven 
years, little more than 10 millions of debt was paid; during a war of seven years, 
more than 100 millions was contracted. (This note was added by Smith to the 
third edition of the Wealth of Nations, which appeared in 1784. The total British 
debt in 1783 had risen to ^238,000,000. By 1 81 6 the wars with France had increased 
it to about ;i^8 76,000,000, the highest point ever reached. — Ed.) 



CHAPTER XXIII 
THE NATURE AND ECONOMIC EFFECTS OF PUBLIC DEBTS 

86. Early Optimistic Theories. — The earhest writers upon 
pubHc debts generally held excessively optimistic or pessimistic 
views concernin'g their effects. Bishop Berkeley suggested that 
the public funds of Great Britain were to be considered ** a 
mine of gold " ; ^ and Melon, a French mercantilist, declared r^ 
" The debts of a state are debts owed by the right hand to the 
left, by which the body will be in no way weakened if it has the 
necessary nourishment and is able to distribute it." 

But most, if not all, other panegyrists of public borrowing 
were outdone by Isaac Pinto, a Dutch merchant of Portuguese 
descent, who wrote : ^ 

I say that the national debt* has enriched the nation. Here 
is the way I prove it. At every loan the government of Eng- 
land, by granting the creditors the proceeds of certain taxes 
which are pledged to pay the interest, creates a new, artificial 
capital which did not exist before and now becomes permanent, 
fixed, and solid. This capital, by the agency of credit, circu- 
lates to the advantage of the public as if it were an actual sum 
of money by which the state had been enriched. Let us take, 
for example, the twelve millions Great Britain borrowed in 
1760, and see what became of them. Is it not true that they 
were spent in great part within the nation itself ? It is only 
the subsidies to other states and a part of the sums spent in 
Germany which were a pure loss. I say a part because even in 

1 The Querist, No. 233 (i 735-37)- 

2 Essai politique sur le commerce, ch. 23 (1734), 
^ Traite de la circulation et du credit (1771). 

* Pinto is here writing of the British debt. — Ed. 

822 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 823 

the war on the continent the EngHsh nation profited by various 
contracts for supplies and by the EngHsh subjects thereby given 
employment. Besides when they spent their money in Ger- 
many, they were simply fertilizing a land from which they draw 
gain through their commerce. The wealth of Germany 
redounds always to the profit of 'the trading nations. But I 
confine myself to the mere observation that it is incontestable 
that a great part of this loan has been employed and kept in 
circulation in the nation itself. England, therefore, will have 
saved a great part of these twelve millions diffused and 
absorbed in the nation itself ; and furthermore the moneyed 
capital of the creditors — who are, in greater part, Englishmen 
— will be augmented by twelve millions which did not formerly 
exist. 

The enormous sum which composes the national debt has never 
existed at any one time ; the magic of credit and of the circulation 
of money has produced this mass of wealth by successive opera- 
tions with the same coins. . . . The existing supply of specie 
suffices to give each part of the public funds its intrinsic value 
as it comes into the market, without exceeding the limits of an 
easy and useful circulation. Public funds are the magnets 
which draw money ; what I say is literally true. Here is the 
way in which possessors of former issues of government securi- 
ties proceed when they undertake to make new loans to the 
government. Not only will they obtain some money in England 
by selling at a somewhat lower figure the consolidated annui- 
ties ^ they hold ; but also, by offering these annuities as security, 
they will be able to arrange with foreign capitalists to obtain 
the large sums which the credit of individuals would not com- 
mand. By this latter expedient they will gather in for some 
time a great deal of money from other countries, and may keep 
it until the circulation has had time to gain an equilibrium and 
the new loans can be distributed among a large number of 
purchasers. There is the solution of this great problem or 
phenomenon of finance. Every one was surprised, and even 
astonished, to see England borrow twelve miUions annually for 

1 The consolidated 3 per cent stock, established in 1751, was long the principal 
part of the British debt. Hence the term " consols." — Ed. 



824 SELECTED READINGS IN PUBLIC FINANCE 

a series of years. This was done by means of former issues of 
the government, with the aid of credit and the monetary circu- 
lation. 

Reflect then on these principles — the nature, the essence, 
and the effects of public loans when properly made and 
employed. You will find that they effectively enrich the state 
and do not impoverish it ; that they double the moneyed capital, 
and, consequently, the power of contracting more loans. 

Pinto did not go so far as to think that this process of creat- 
ing wealth by public borrowing could continue indefinitely. He 
said, in fact, a country could " accumulate too great a debt " and 
thereby embarrass itself. But he insisted that, within limits, 
public debt is an addition to the wealth of a nation, and, there- 
fore, should never be wholly extinguished : 

It follows from all I have just said that, even if England could, 
thanks to a long peace, the operation of her sinking fund, and 
the growth of her commerce, succeed in paying off the whole 
of her national debt, she ought not to do it. It would be very 
harmful to that kingdom not to preserve at least sixty millions 
sterling of its artificial riches, the utility and necessity of which 
I have demonstrated. 

87. The Views of Alexander Hamilton. — Views similar to 
those of Pinto's were sometimes expressed by Alexander Hamil- 
ton, who, as secretary of the treasury, was obliged to give 
much study to the subject of public debts. Perhaps the most 
extreme statement made by Hamilton was the following : ^ 

Trace the progress of a public debt in a particular case. The 
government borrows of an individual $ioo in specie, for which 
it gives its funded bonds. These $ioo are expended on some 
branch of the public service. It is evident they are not annihi- 
lated ; they only pass from the individual who lent, to the indi- 
vidual or individuals to whom the government has disbursed 

1 Lodge's edition of Hamilton's works, VII, 407-408. 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 825 

them. They continue, in the hands of their new masters, to 
perform their usual functions, as capital. But besides this, the 
lender has the bonds of the government for the sum lent. These, 
from their negotiable and easily vendible nature, can at any 
moment be applied by him to any useful or profitable under- 
taking which occurs ; and thus the credit of the government 
produces a new and additional capital, equal to $100, which, 
with the equivalent for the interest on that sum, temporarily 
diverted from other employments while passing into and out of 
the public coffers, continues its instrumentality as a capital, while 
it remains not reimbursed. 

In his celebrated Report on Public Credit, in 1790, Hamilton 
advanced the same argument, although perhaps more moder- 
ately, in favor of funding the mass of debts inherited from the 
old Confederation. He said : ^ 

It is a well-known fact, that, in countries in which the national 
debt is properly funded, and an object of established confidence, 
it answers most of the purposes of money. Transfers of stock, 
or public debt, are there equivalent to payments in specie ; or, 
in other words, stock, in the principal transactions of business, 
passes current as specie. The same thing would, in all proba- 
bility, happen here, under the like circumstances. 

The benefits of this are various and obvious : 

First. Trade is extended by it; because there is a larger 
capital to carry it on, and the merchant can, at the same time, 
afford to trade for smaller profits ; as his stock, which, when 
unemployed, brings him in an interest from the government, 
serves him also as money when he has a call for it in his com- 
mercial operations. 

Secondly. Agriculture and manufactures are also promoted 
by it ; for the like reason, that more capital can be commanded 
to be employed in both ; and because the merchant, whose en- 
terprise in foreign trade gives to them activity and extension, has 
greater means for enterprise. 

Thirdly. The interest of money will be lowered by it ; for 
this is always in a ratio to the quantity of money, and to the 

1 Works, II, ^2 et seq. 



826 SELECTED READINGS IiN PUBLIC FINANCE 

quickness of circulation. This circumstance will enable both 
the public and individuals to borrow on easier and cheaper 
terms. 

And, from the combination of these effects, additional aids 
will be furnished to labor, to industry, and to arts of every kind. 
But these good effects of a pubUc debt are only to be looked for 
when, by being well funded, it has acquired an adequate and 
stable value ; till then, it has rather a contrary tendency. The 
fluctuation and insecurity incident to it in an unfunded state, 
render it a mere commodity, and a precarious one. As such, being 
only an object of occasional and particular speculation, all the 
money applied to it is so much diverted from the more useful 
channels of circulation, for which the thing itself affords no 
substitute ; so that, in fact, one serious inconvenience of an 
unfunded debt is, that it contributes to the scarcity of money. 

This distinction, which has been little, if at all attended to, is 
of the greatest moment ; it involves a question imimediately in- 
teresting to every part of the community, which is no other than 
this : Whether the public debt, by a provision for it on true 
principles, shall be rendered a substitute for money ; or whether, 
by being left as it is, or by being provided for in such a manner 
as will wound these principles, and destroy' confidence, it shall be 
suffered to continue as it is — a pernicious drain of our cash from 
the channels of productive industry. 

The effect which the funding of the public debt, on right 
principles, would have upon landed property, is one of the cir- 
cumstances attending such an arrangement, which has been 
least adverted to, though it deserves the most particular atten- 
tion. The present depreciated state of that species of property 
is a serious calamity. The value of cultivated lands, in most of 
the states, has fallen, since the Revolution, from 25 to 50 
per cent. In those further south, the decrease is still more 
considerable. Indeed, if the representations continually received 
from that quarter may be credited, lands there will command no 
price which may not be deemed an almost total sacrifice. This 
decrease in the value of lands ought, in a great measure, to be 
attributed to the scarcity of money ; consequently, whatever 
produces an augmentation of the moneyed capital of the country 
must have a proportional effect in raising that value. The 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 827 

beneficial tendency of a funded debt, in this respect, has been 
manifested by the most decisive experience in Great Britain.^ 

At another time, after restating his belief that a funded debt 
operates as capital, he proceeded to make some important quali- 
fications of the doctrine : ^ 

The effect of a funded debt, as a species of capital, has been 
noticed upon a former occasion ; but a more particular elucida- 
tion of the point seems to be required by the stress which is here 
laid upon it. This shall accordingly be attempted. 

PubHc funds answer the purpose of capital, from the estima- 
tion in which they are usually held by moneyed men ; and con- 
sequently from the ease and dispatch with which they can be 
turned into money. This capacity of prompt convertibility into 
money causes a transfer of stock to be, in a great number of 
cases, equivalent to a payment in coin ; and where it does not 
happen to suit the party who is to receive to accept a transfer of 
stock, the party who is to pay is never at a loss to find elsewhere 
a purchaser of his stock, who will furnish him, in lieu of it, with 
the coin of which he stands in need. 

Hence, in a sound and settled state of the public funds, a 
man possessed of a sum in them can embrace any scheme of 
business which offers, with as much confidence as if he were 
possessed of an equal sum in coin. 

Tfc ^ 7|c yf: Tie •Jfc . 'I* 

In the question under discussion, it is important to distinguish 
between an absolute increase of capital, or an accession of real 
wealth, and an artificial increase of capital, as an engine of 
business, or as an instrument of industry and commerce. In 
the first sense, a funded debt has no pretensions to being deemed 

1 Yet, Hamilton did not go so far as to say, as Pinto did, that the debt should 
never be wholly paid off. lie said, in fact : " Persuaded as the secretary is that the 
proper funding of the present debt will render it a national blessing, yet he is so far 
from acceding to the position, in the latitude in which it is sometimes laid down, that 
'public debts are public benefits' — a position inviting to prodigality, and liable to 
dangerous abuse — that he ardently wishes to see it incorporated, as a fundamental 
maxim, in the system of public credit in the United States, that the creation of debt 
should always be accompanied with the means of extinguishment. This he regards 
as the true secret for rendering pubhc credit immortal." ^ Works, III, 34^347 



828 SELECTED READINGS IN PUBLIC FINANCE 

an increase of capital; ^ in the last, it has pretensions which are 
not easy to be controverted. Of a similar nature is bank credit, 
and, in an inferior degree, every species of private credit. 

But though a funded debt is not, in the first instance, an 
absolute increase of capital, or an augmentation of real wealth, 
yet, by serving as a new power in the operations of industry, 
it has, within certain bounds, a tendency to increase the real 
wealth of a community; in like manner, as money borrowed by 
a thrifty farmer to be laid out in the improvement of his farm 
may, in the end, add to his stock of real riches. 

There are respectable individuals, who, from a just aversion 
to an accumulation of public debt, are unwilling to concede to it 
any kind of utility ; who can discern no good to alleviate the ill 
with which they suppose it pregnant ; who cannot be persuaded 
that it ought, in any sense, to be viewed as an increase of capi- 
tal, lest it should be inferred that the more debt, the more capi- 
tal, the greater the burdens, the greater the blessings of the 
community. 

But it interests the public councils to estimate every object as 
it truly is ; to appreciate how far the good in any measure is 
compensated by the ill, or the ill by the good : either of them 
is seldom unmixed. 

Neither will it follow that an accumulation of debt is desirable, 
because a certain degree of it operates as capital. There may 
be a plethora in the political as in the natural body. There 
may be a state of things in which any such artificial capital is 
unnecessary. The debt, too, may be swelled to such a size as 
that the greatest part of it may cease to be useful as a capital, 
serving only to pamper the dissipation of idle and dissolute indi- 
viduals ; as that the sums required to pay the interest upon it 
may become oppressive, and beyond the means which a govern- 
ment can employ, consistently with its tranquilHty, to raise them ; 
as that the resources of taxation, to face the debt, may have been 
strained too far to admit of extensions adequate to exigencies 
which regard the public safety. Where this critical point is 



1 This statement offers the sharpest contrast to the proposition laid down by 
Hamilton in the first extract here given. It is not possible to reconcile all of his 
remarks about public credit. — Ed. 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 829 

cannot be pronounced ; but it is impossible to believe that there 
is not such a point. 

88. National Debts as a "National Blessing." — During the 
Civil War our government frequently had difficulty in marketing 
its bonds upon the terms prescribed by Congress ; and on sev- 
eral occasions employed a Philadelphia banker, Mr. Jay Cooke, 
as general subscription agent, to sell the bonds to investors. 
Mr. Cooke engaged a large number of sub-agents, and pushed 
vigorously the sale of the bonds. In the course of this work he 
published and distributed broadcast a pamphlet in which the 
national debt is represented as a national blessing. The follow- 
ing extracts from this pamphlet^ are now presented : 

We lay down the proposition that our national debt, made 
permanent and rightly managed, will be a national blessing. 

The Burthen of Interest the Measure of a Debt — not 

THE Principal 

In studying these Permanent Debts, and discussing the policy 
of maintaining them, or discharging them by payment, the mind 
should free itself from the tyranny of words. Great Britain is 
in debt to Great Britain. Great Britain does, indeed, owe -Great 
Britain four thousand millions of dollars. The burthen of the 
debt crushes the mind in contemplation of it. But its vastness 
is not the measure of the obligation — for there is no engage- 
ment on the part of the debtor kingdom to pay the principal of 
the debt, and little if any expectation, and less desire on the 
part of its creditor subjects that it shall be paid. The principal 
of the debt being thus removed from our educated idea of a 
legal burthen, and of the necessity to discharge a pecuniary 
obligation, ceases to represent the burthen. The interest of the 
debt only becomes the measure of its burthen. Great Britain 
does owe to Great Britain confessedly four thousand millions. 
But practically, and by consent and harmonious arrangement, 

1 How Our National Debt may be a National Blessing, by Samuel Wilkeson 
Issued by Jay Cooke (Philadelphia, 1865), 



830 SELECTED READINGS IN PUBLIC FINANCE 

Great Britain owes to Great Britain only one hundred and 
twenty-seven millions of dollars a year. And that is a very 
small debt for the proprietors and workmen of the "Workshop 
of the world " to owe to each other. ... 

Such, too, should be the regard of our Debt The United 
States will owe, mostly to the people of the United States, one 
hundred and sixty-five millions of dollars a year. The burthen 
nominally $86.72 upon every citizen, and less than that of the 
British debt, unlike that of Great Britain, will every year rapidly 
diminish by the rapid increase of our population by immigration 
and natural growth, and by the rapid augmentation of our 
wealth. For, among the other blessings of our War will prob- 
ably be the transfer of the Workshop of the w^orld, from Eng- 
land to America. 



The British Debt added Four Thousand Millions to 
Previous British Capital 

The Englishman who has ^20,000 in 3 per cent consols at 
his banker's, and only ten guineas in his pocket, and who gives 
assent to a proposal made to him to go mine for coal on Van- 
couver's Island, has got ^£20,000 in cash to go into the opera- 
tion. He knows that positively. The world knows it. British 
consols are cash capital. This cannot be controverted. And 
the four thousand millions of British debt is national cash capital 
to the industry and commerce of Great Britain. For half a 
century this seemingly and nominally huge and burthensome 
debt has served to vitalize the manufacturing and trading genius 
of the English people, and as money, has enabled the British 
to do for that long time the marine carrying for the world, and 
to make for the world, cloth, iron, steel, tin, and hardware. 
This enormous mass of capital, infused into the business of 
England at the close of her twenty-two years' war with the 
French RepubHc and Empire — almost always of par with gold 
— convertible daily and hourly into gold — accepted as gold in 
all transactions, was the source of that prodigious development 
of mechanical industry and accumulation of wealth, which so 
suddenly bore upward the English after the battle of Waterloo 
to the command of the trade and finances of the globe. 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 831 

It was not the industry, persistency, and frugality of the 
British people — it was not their insular position — it was not 
their coals nor their iron stone that gave them supremacy on 
the ocean and in the money markets and trading exchanges 
of both hemispheres. Their insular position was against them. 
Their limited island territory was unfavorable to empire. Theit 
want of space and their climate made them dependent upon 
other countries for their bread. They became supreme as mer- 
chants, manufacturers, and money lenders, simply because their 
national debt added four thousand millions of capital to their 
previously acquired wealth, and simply because this, vast infu- 
sion of wealth, which had every business virtue of standard 
coin, spurred the industry of the island, developed its mineral 
resources, invented and put in motion a vast mass of machinery 
which spun, wove, and hammered for the world, and undersold 
the world, and sent the world to London to pay debt and to 
borrow money. What place among the cities of the world 
would not a permanent American debt of four thousand millions 
give New York .-* 



Our Debt just so much Capital added to our Wealth 

It is precisely so with the War Debt of the United States. 
Seven-Thirties are available for any enterprise to which unoc- 
cupied lands, undeveloped mines, unestablished arts, and un- 
seized commerce, invite Americans. They are cash capital, 
literally, absolutely, and without figure of speech. Practically 
they are cash in bank and cash in the pocket. The artificial 
measures of their value which Stock Exchanges have succeeded 
in instituting, at times nominally gave fluctuation to their worth 
as they lie in the bureau drawers of farmers. But in reality the 
depreciation of Wall Street does not whittle off the thousandth 
part of a hair's breadth from that worth. Those farmers know 
that they are a first bond and mortgage upon all the United 
States, and on all the people in the United States, and upon 
their children, and their children's children. But whether 3 per 
cent above par or i per cent above par, holders of this War 
Debt of Three Thousand Millions can at any day and any 



S^2 SELECTED READINGS IN PUBLIC FINANCE 

hour, from San Francisco to New York, and from Portland to 
New Orleans, convert it into cash. 

The Funded Debt of the United States is the addition of 
three thousand millions of dollars to the previously realized 
wealth of the nation. It is three thousand millions added to its 
available active capital. To pay this debt would be to extinguish 
this capital and to lose this wealth. To extinguish this capital 
and lose this wealth would be an inconceivably great national 
misfortune. 

Our National Debt the Bond of Our Union 

This, our National War Debt, should be held forever in place 
as the political tie of the states and the bond forever of a fra- 
ternal nationality. It will give a common interest in the Union 
that nothing else can give. It will impart to a co-partnership 
between thirty-five millions of people the unity of feeling arising 
from a community of interest in a co-partnership capital of three 
thousand millions of dollars. Tied to the Union by the Union 
debt, nor Western states, nor Southern states — states beyond 
the Rocky Mountains nor states by the Atlantic Sea — states 
that plant nor states that weave — states that mine nor states 
that smelt and hammer, can ever find inducement in sectional 
interests to draw asunder from each other. . . . 

Our National Debt Protection to our National 
Industry 

Our National Debt should be held firmly in place as the 
foundation of a system of diversified national industry which 
shall relieve us from dependence upon Europe — shall give us 
the near and cheap home market instead of the distant and 
costly foreign market — shall double the profits of farming by 
doubHng the markets for farm products — shall swell the class 
that is devoted to Agriculture, which is the sheet anchor of 
Democracies — shall free man by freeing Labor, by giving it 
many markets in which to sell itself to competing bidders. The 
maintenance of our National Debt is Protection. The destruc- 
tion of it by payment is bondage again to the manufacturers 
of Europe. 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 833 

89. The Views of Adam Smith. — A much less favorable viewj^ 
of the nature and effects of a public debt was taken by Adam 
Smith who wrote : ^ 

The public funds of the different indebted nations of Europe, 
particularly those of England, have by one author been repre- 
sented as the accumulation of a great capital superadded to the 
other capital of the country, by means of which its trade is ex- 
tended, its manufactures multiplied, and its lands cultivated and 
improved much beyond what they could have been by means of 
that other capital only. He does not consider that the capital 
which the first creditors of the public advanced to government, 
was, from the moment in which they advanced it, a certain por- 
tion of the annual produce turned away from serving in the func- 
tion of a capital to serve in that of a revenue ; from maintaining 
productive laborers to maintain unproductive ones, and to be 
spent and wasted, generally in the course of the year, without 
even the hope of any future reproduction. In return for the 
capital which they advanced they obtained, indeed, an annuity in 
the public funds in most cases of more than equal value. This 
annuity, no doubt, replaced to them their capital, and enabled 
them to carry on their trade and business to the same, or, perhaps, 
to a greater extent than before ; that is, they were enabled either 
to borrow of other people a new capital upon the credit of this 
annuity, or by selling it, to get from other people a new capital 
of their own, equal or superior to that which they had advanced 
to government. This new capital, however, which they in this 
manner either bought or borrowed of other people, must have 
existed in the country before, and must have been employed as 
all capitals are, in maintaining productive labor. When it 
came into the hands of those who had advanced their money to 
government, though it was in some respects a new capital to 

^ Hume and others had already expressed unfavorable views. Hume, for instance, 
argued that public borrowing, (i) caused undue concentration of population and 
wealth at the capital; (2) tended, so far as public stocks served as credit money, 
to drive gold and silver out of the country; (3) caused injurious increase of taxes; 
(4) made a country tributary to foreigners in case any large amount of its debt was 
held in other lands; and (5) enabled fundholders to live a " useless and inactive 
life " at the expense of the industrious taxpayers. Essay on Public Credit. 

2 Wealth of Nations, Bk. V, ch. 3. 



834 SELECTED READINGS IN PUBLIC FINANCE 

them, it was not so to the country ; but was only a capital with- 
drawn from certain employments in order to be turned toward 
others. Though it replaced to them what they had advanced to 
government, it did not replace it to the country. Had they not 
advanced this capital to government, there would have been in 
the country two capitals, two portions of the annual produce 
instead of one, employed in maintaining productive labor. 

When for defraying the expense of government a revenue is 
raised within the year from the produce of free or unmortgaged 
taxes, a certain portion of the revenue of private people is only 
turned away from maintaining one species of unproductive labor 
toward maintaining another. Some part of what they pay in 
those taxes might, no doubt, have been accumulated into capital, 
and consequently employed in maintaining productive labor, but 
the greater part would probably have been spent, and conse- 
quently employed in maintaining unproductive labor. The pub- 
lic expense, however, when defrayed in this manner, no doubt 
hinders more or less the further accumulation of new capital ; but 
it does not necessarily occasion the destruction of any actually 
existing capital. 

When the public expense is defrayed by funding, it is defrayed 
by the annual destruction of some capital which had before ex- 
isted in the country ; by the perversion of some portion of the 
annual produce which had before been destined for the mainte- 
nance of productive labor, toward that of unproductive labor. ^ 

1 Elsewhere (Bk. II, ch. 3) Smith had defined productive and unproductive labor 
as follows : 

"There is one sort of labor which adds to the value of the subject upon which it 
is bestowed : there is another which has no such effect. The former, as it produces 
a value, may be called productive; the latter, unproductive labor. Thus the labor 
of a manufacturer adds, generally, to the value of the materials which he works upon, 
that of his own maintenance and of his master's profit. The labor of a menial servant, 
on the contrary, adds to the value of nothing. Though the manufacturer has his 
wages advanced to him by his master, he, in reality, costs him no expense, the value 
of those wages being generally restored, together with a profit, in the improved value 
of the subject upon which his labor is bestowed. But the maintenance of a menial 
servant never is restored. A man grows rich by employing a multitude of manu- 
facturers : he grows poor by maintaining a multitude of menial servants. The labor 
of the latter, however, has its value, and deserves its reward as well as that of the 
former. But the labor of the manufacturer fixes and realizes itself in some particular 
subject or vendible commodity, which lasts for some time at least after that labor is 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 835 

As in this case, however, the taxes are Hghter than they would 
have been, had a revenue sufficient for defraying the same ex- 
pense been raised within the year, the private revenue of indi- 
viduals is necessarily less burdened, and consequently their 
ability to save and accumulate some part of that revenue into 
capital is a good deal less impaired. If the method of funding 
destroy more old capital, it at the same time hinders less the 
accumulation or acquisition of new capital, than that of defray- 
ing the public expense by a revenue raised within the year. 
Under the system of funding, the frugality and industry of pri- 
vate people can more easily repair the breaches which the waste 
and extravagance of government may occasionally make in the _ / l 
general capital of the society. ^ ^ -^ 

Tt is only during the continuance of war that the system of 
funding has this advantage over the other system. Were the 
expense of war to be defrayed always by a revenue raised within 
the year, the taxes from which that extraordinary revenue was 
drawn would last no longer than the war. The ability of pri- 
vate people to accumulate, though less during the war, would 
have been greater during the peace than under the system of 
funding. War would not necessarily have occasioned the 
destruction of any old capitals, and peace would have occa- 
sioned the accumulation of many more new. Wars would in 
general be more speedily concluded and less wantonly under- 
taken. The people feeling, during the continuance of the war, 
the complete burden of it, would soon grow weary of it, and 
government, in order to humor them, would not be under the 
necessity of carrying it on longer than it was necessary to do so. 
The foresight of the heavy and unavoidable burdens of war 
would hinder the people from wantonly calling for it when there 
was no real or solid interest to fight for. The seasons during 
which the ability of private people to accumulate was somewhat 

past. It is, as it were, a certain quantity of labor stocked and stored up to be 
employed, if necessary, upon some other occasion. That subject, or what is the 
same thing, the price of that subject, can afterward, if necessary, put into motion 
a quantity of labor equal to that which had originally produced it. The labor of 
the menial servant, on the contrary, does not fix or realize itself in any particular 
subject or vendible commodity. The services of the menial generally perish in the 
very instant of their performance, and seldom leave any trace of value behind them, 
for which an equal quantity of service could afterward be procured." — Ed. 



836 SELECTED READINGS IN PUBLIC FINANCE 

impaired, would occur more rarely, and be of shorter continu- 
ance. Those, on the contrary, during which that ability was in 
the highest vigor, would be of much longer duration than they 
, can well be under the system of funding. 
^^ When funding, besides, has made a certain progress, the mul- 
tiplication of taxes which it brings along with it sometimes 
impairs as much the ability of private people to accumulate even 
in time of peace, as the other system would in time of war. 
The peace revenue of Great Britain amounts at present to more 
than ten millions a year. If free and unmortgaged, it might be 
sufficient, with proper management, and without contracting a 
shilling of new debt, to carry on the most vigorous war. The 
private revenue of the inhabitants of Great Britain is at present 
as much incumbered in time of peace, their ability to accumulate 
it as much impaired, as it would have been in the time of the 
most expensive war, had the pernicious system of funding never 
been adopted. 

In the payment of the interest of the public debt, it has been 
said, it is the right hand which pays the left. The money does 
not go out of the country. It is only a part of the revenue of 
one set of the inhabitants which is transferred to another ; 
and the nation is not a farthing the poorer. This apology is 
founded altogether in the sophistry of the mercantile system, 
and after the long examination which I have bestowed upon 
that system, it may perhaps be unnecessary to say anything 
further about it. It supposes that the whole public debt is 
owing to the inhabitants of the country, which happens not to 
be true ; the Dutch, as well as several other foreign nations, 
having a very considerable share in our public funds. But 
though the whole debt were owing to the ' inhabitants of the 
country, it would not upon that account be less pernicious. 
V^» Land and capital stock are the two original sources of all 

revenue, both private and public. Capital stock pays the wages 
of productive labor, whether employed in agriculture, manu- 
factures, or commerce. The management of those two original 
sources of revenue belongs to two different sets of people ; the 
proprietors of land, and the owners or employers of capital 
stock. 

The proprietor of land is interested, for the sake of his own 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 83; 

revenue, to keep his estate in as good condition as he can, by 
building and repairing his tenants' houses, by making and main- 
taining the necessary drains and inclosures, and all those other 
expensive improvements which it properly belongs to the land- 
lord to make and maintain. But by different land taxes the 
revenue of the landlord may be so much diminished ; and by 
different duties upon the necessaries and conveniences of life, 
that diminished revenue may be rendered of so little real value, 
that he may find himself altogether unable to make or maintain 
those expensive improvements. When the landlord, however, 
ceases to do his part, it is altogether impossible that the tenant 
should continue to do his. As the distress of the landlord 
increases, the agriculture of the country must necessarily 
decline. 

When, by different taxes upon the necessaries and conven- 
iences of life, the owners and employers of capital stock find 
that whatever revenue they derive from it will not, in a particular 
country, purchase the same quantity of those necessaries and 
conveniences which an equal revenue would in almost any other, 
they will be disposed to remove to some other. And when, in 
order to raise those taxes, all or the greater part of merchants 
and manufacturers, that is, all or the greater part of the employ- 
ers of great capitals, come to be continually exposed to the 
mortifying and vexatious visits of the taxgatherers, this disposi- 
tion to remove will soon be changed into an actual removal. 
The industry of the country will necessarily fall with the re- 
moval of the capital which supported it, and the ruin of trade 
and manufactures will follow the declension of agriculture. 

To transfer from the owners of those two great sources of 
revenue, land and capital stock, from the persons immediately 
interested in the good condition of every particular portion of 
land, and in the good management of every particular portion 
of capital stock, to another set of persons (the creditors of 
the public, who have no such particular interest), the greater 
part of the revenue arising from either, must, in the long run, 
occasion both the neglect of land, and the waste or removal of 
capital stock. A creditor of the public has, no doubt, a general 
interest in the prosperity of the agriculture, manufactures, and 
commerce of the country ; and consequently in the good con- 



838 selectf:d readings in public finance 

dition of its lands, and in the good management of its capital 
stock. Should there be any general failure or declension ii? 
any of these things, the produce of the different taxes might no 
longer be sufficient to pay him the annuity or interest which is 
due to him. But a creditor of the public, considered merely 
as such, has no interest in the good condition of any particular 
portion of land, or in the good management of any particular 
portion of capital stock. As a creditor of the public he has 
no knowledge of any such particular portion. He has no in- 
spection of it. He can have no care about it. Its ruin may 
in some cases be unknown to him, and cannot directly affect 
him. 

^^ The practice of funding has gradually enfeebled every state 

which has adopted it. The Italian republics seem to have begun 
it. Genoa andVenice, the only two remaining which can pre- 
tend to an independent existence, have both been enfeebled by 
it. Spain seems to have learned the practice from the Ital- 
ian republics, and (its taxes being probably less judicious than 
theirs) it has, in proportion to its natural strength, been still 
more enfeebled. The debts of Spain are of very old standing. 
It was deeply in debt before the end of the sixteenth century, 
about a. hundred years before England owed a shilling. France, 
notwithstanding all its national resources, languishes under an 
oppressive load of the same kind. The republic of the United 
Provinces is as much enfeebled by its debts as either Genoa or 
Venice. Is it likely that in Great Britain alone a practice, 
which has brought either weakness or desolation into every 
other country, should prove altogether innocent 1 

\y The system of taxation established in those different coun- 
tries, it may be said, is inferior to that of England. I believe 
it is so. But it ought to be remembered, that when the 
wisest government has exhausted all the proper subjects of 
taxation, it must, in cases of urgent necessity, have recourse 
to improper ones. The wise repubhc of Holland has upon 
some occasions been obhged to have recourse to taxes as 
inconvenient as the greater part of those of Spain. Another 
war begun before any considerable liberation of the public rev- 
enue had been brought about, and growing in its progress as 
expensive as the last war, may, from irresistible necessity, 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 839 

render the British system of taxation as oppressive as that of 
Holland, or even as that of Spain. To the honor of our 
present system of taxation, indeed, it has hitherto given so 
little embarrassment to industry, that during the course even of 
the most expensive wars, the frugality and good conduct of 
individuals seem to have been able, by saving and accumulation, 
to repair all the breaches which the waste and extravagance of 
government had made in the general capital of the society. 
At the conclusion of the late war, the most expensive that 
Great Britain ever waged, her agriculture was as flourishing, 
her manufactures as numerous and as fully employed, and 
her commerce as extensive, as they had ever been before. The 
capital, therefore, which supported all those different branches 
of industry, must have been equal to what it had ever been 
before. Since the peace, agriculture has been still further 
improved, the rents of houses have risen in every town and 
village of the country, a proof of the increasing wealth and 
revenue of the people ; and the annual amount of the greater 
part of the old taxes, of the principal branches of the excise and 
customs in particular, has been continually increasing, an 
equally clear proof of an increasing consumption, and conse- 
quently of an increasing produce, which could alone support 
that consumption. Great Britain seems to support with ease a 
burden, which, half a century ago, nobody believed her capable 
of supporting. Let us -not, however, upon this account rashly 
conclude that she is capable of supporting any burden, nor 
even be too confident that she could support, without great 
distress, a burden a little greater than what has already been 
laid upon her. 

When national debts have once been accumulated to a certain 
degree, there is scarce, I believe, a single instance of their hav- 
ing been fairly and completely paid. The liberation of the 
public revenue, if it has ever been brought about at all, has 
always been brought about by a bankruptcy ; sometimes by an 
avowed one, but always by a real one, though frequently by a 
pretended payment. 

(Smith then proceeds to consider such expedients as tampering 
with the coinage.) 



840 SELECTED READINGS IN PUBLIC FINANCE 

90. The Views of Jean Baptiste Say. — To much the same 
effect, a generation later, the French economist. Say, wrote: 

There is this grand distinction between an individual borrower 
and a borrowing government, that, in general, the former bor- 
rows capital for the purpose of beneficial employment, the latter 
for the purpose of barren consumption and expenditure. A 
nation borrows, either to satisfy an unlooked-for demand, or to 
meet an extraordinary emergency ; to which ends, the loan may 
prove effectual or ineffectual ; but, in either case, the whole sum 
borrowed is so much value consumed and lost, and the public 
revenue remains burdened with the interest upon it. 

Melon maintains, that national debt is no more than a debt 
from the right hand to the left, which nowise enfeebles the body 
politic. But he is mistaken ; the state is enfeebled, inasmuch 
as the capital lent to its government, having been destroyed in 
the consumption of it by the government, can no longer yield 
anybody the profit, or in other words, the interest, it might earn 
in the character of a productive means'. Wherewith, then, is the 
government to pay the interest of its debt .? Why, with a por- 
tion of the revenue arising from some other source, which it must 
transfer from the taxpayer to the public creditor for the purpose. 

Before the act of borrowing, there will have been in existence 
two productive capitals, each of them yielding, or capable of 
yielding, revenue ; that is to say, a capital about to be lent to the 
government, and a capital whereon the future taxpayers derive 
that revenue, which is about to be applied in satisfaction of the 
interest upon the capital lent. After the act of borrowing, there 
will remain but one of these capitals ; viz. the latter of the two, 
whereof the revenue is thenceforward no longer at the disposal 
of its former possessors, the present taxpayers, since it must be 
taken in some form of taxation or other by the government, for 
the sake of providing the payment of interest to its creditors. 
The lender loses no part of his revenue : the only loser is the 
payer of taxes. 

******* 

National loans of every kind are attended with the universal i 
disadvantage, of withdrawing capital from productive employ- * 
ment, and diverting it to the channel of barren consumption ; 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 841 

and, in countries where the credit of the government is at a low 
ebb, with the further and particular disadvantage, of raising the 
interest of capital. Who can be expected to lend at 5 per cent 
to the farmer, the manufacturer, or the merchant, while he can 
readily get an offer of 7 or 8 per cent from the government ? 
That class of revenue, which has been called profit of capital, is 
thereby advanced in its ratio, at the expense of the consumer : 
the consumption falls off, in consequence of the advance in the 
real price of products ; the productive agency of the other sources 
of production are less in demand, and, consequently, worse paid ; 
and the whole community is the sufferer, with the sole exception 
of the capitalist. 

The ability to borrow affords one main advantage to the state ; 
viz. the power of apportioning the burden entailed by a sudden 
emergency among a great number of successive years. In the 
present state of public affairs, and on the present scale of inter- 
national warfare, no country could support the enormous expense 
from its ordinary annual revenue. The larger states pay in 
taxation nearly as much as they are able ; for economy is by 
no means the order of the day with them ; and their ordinary 
expenditure seldom falls much short of the income. If the 
expenditure must be doubled to save the nation from ruin, bor- 
rowing is usually the only resource ; unless it can make up its 
mind to violate all subsisting engagements, and be guilty of 
spoliation of its own subjects and foreigners too. The faculty 
of borrowing is a more powerful agent than even gunpowder ; 
but probably the gross abuse that is made of it will soon destroy 
its efficacy. 

Great pains have been taken, to find in the system of borrow- 
ing, as well as in taxation, some inherent advantage, beyond 
that of supplying the public consumption. But a close examina- 
tion will expose the hopelessness of such an attempt. 

It has been maintained, for instance, that the debentures and 
securities which form a national debt, become real and substan- 
tial values existing within the community ; that the capital, of 
which they are the evidence or representative, is so much posi- 
tive wealth, and must be reckoned as an item of the total sub- 
stance of the nation. But it is not so ; a written contract or 
security is a mere evidence, that such or such property belongs 



842 SELECTED READINGS IN PUBLIC FINANCE 

to such an individual. But wealth consists in the property itself , 
and not in the parchment, by which its ownership is evidenced ; 
therefore, (^ /(^r/Z^rz, a security is not even an evidence of wealth, 
where it does not represent an actual existing value, but when 
it operates as a mere power of attorney from the government 
to its creditor, enabling him to receive annually a specified por- 
tion of the revenue expected to be levied upon the taxpayers at 
large. Supposing the security to be canceled, as it might be 
by a national bankruptcy, would there be the least diminution 
of wealth in the community ? Undoubtedly not. The only 
difference would be, that the revenue, which before went to the 
public creditor, would now be at the disposal of the taxpayer, 
from whom it used to be taken. 

Those who tell us that the annual circulation is increased by 
the whole amount of the annual disbursements of the govern- 
ment, forgot that these disbursements are made out of the 
annual products, and are a portion of the annual revenue, taken 
from the taxpayer, which would have been brought into the 
general circulation just the same, although no such thing as 
national debt had existed. The taxpayer would have spent what 
is now spent by the public creditor ; that is all. 

The sale or purchase of debentures or securities is not a pro- 
ductive circulation, but a mere substitution of one pubhc creditor 
in place of another. When these transfers degenerate into stock- 
jobbing, that is to say, the making of a profit by the rise and 
fall of their price, they are productive of much mischief ; in the 
first place, by the unproductive employment on this object of 
the agent of circulation, money, which is an item of the national 
capital; and, in the next, by procuring a gain to one person by 
the loss of another, which is the characteristic of all gaming. 
The occupation of the stockjobber yields no new or useful 
product ; consequently, having no product of his own to give in 
exchange, he has no revenue to subsist upon, but what he con- 
trives to make out of the unskillf ulness or ill fortune of gamesters 
like himself. 

A national debt has been said to bind the public creditors 
more firmly to the government, and make them its natural sup- 
porters by a sense of common interest ; and so it does beyond 
all doubt. But, as this common interest may attach equally to a 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 843 

bad or a good government, there is just as much chance of its 
being an injury as a benefit to the nation. If we look at Eng- 
land, we shall see a vast number of well-meaning persons in- 
duced by this motive to uphold the abuses and misgovernment 
of a wretched administration. 

It has been further urged, that a national debt is an index of 
the public opinion, respecting the degree of credit which the 
government deserves, and operates as a motive to its good con- 
duct and endeavor to preserve the public opinion, of which 
such a debt furnishes the index. This cannot be admitted with- 
out some qualification. The good conduct of government, in 
the eyes of the public creditors, consists in the regular payment 
of their own dividends ; but, in the eyes of the taxpayers, it 
consists in spending as little as possible. The market price of 
stock does, indeed, furnish a tolerable index of the former kind 
of good conduct, but not of the latter. Perhaps it would be no 
exaggeration to say, that the punctual payment of the dividends, 
instead of being a sign of good, is in numberless instances a 
cloak to bad government ; and, in some countries, a boon for 
the toleration of frequent and glaring abuses. 

Another argument in favor of national debt is, that it affords 
a prompt investment to capital, which can find no ready and 
profitable employment, and thus must, at any rate, prevent its 
emigration. If it do so, so much the worse ; it is a bait to 
tempt capital toward its destruction, leaving the nation bur- 
dened with the annual interest, which government must provide. 
It is far better that the capital should emigrate, as it would prob- 
ably return sooner or later ; and then its interest for the mean- 
time will be chargeable to foreigners. A national debt of 
moderate amount, the capital of which should have been well 
and judiciously expended in useful works, might indeed be at- 
tended with the advantage of providing an investment for minute 
portions of capital, in the hands of persons incapable of turning 
them to account, who would probably keep them locked up, or 
spend them by driblets, but for the convenience of such an 
investment. This is perhaps the sole benefit of a national 
debt ; and even this is attended with some danger, inasmuch 
as it enables a government to squander the national savings. 
For, unless the principal be spent upon objects of permanent 



844 SELECTED READINGS IN PUBLIC FINANCE 

public benefit, as on roads, canals, or the like, it were better for 
the public that the capital should remain inactive, or concealed ; 
since, if the public lost the use of it, at least it would not have 
to pay the interest. 

Thus, it may be expedient to borrow, when capital must be 
spent by a government, having nothing but the usufruct at its 
command ; but we are not to imagine, that, by the act of bor- 
rowing, the public prosperity can be advanced. The borrower, 
whether a sovereign or an individual, incurs an annual charge 
upon his revenue, besides impoverishing himself to the full 
amount of the principal, if it be consumed ; and nations never 
borrow but with a view to consume outright. 

91. The Views of Karl Dietzel. — The opinions of Adam Smith 
and of such disciples as Say had a profound influence upon the 
later development of financial theory. About the middle of the 
nineteenth century, however, a German economist, Karl Dietzel, 
raised a vigorous protest against the view of public debts then 
prevalent ; and developed a theory which has had considerable 
influence upon later German writers. Dietzel said, in part : ^ 

From Adam Smith's time down to the present a one-sided 
view of public loans has prevailed in financial theory, and is 
encountered in the work of most writers. It is based upon 
Smith's erroneous conception of capital and income. In brief 
the substance of this doctrine is as follows : 

Taxes are paid out of income ; loans, out of capital. If, 
therefore, the funds needed for extraordinary expenditures are 
raised by taxation, the people, as a result of their natural dis- 
like of weakening their economic position, will restrict their 
consumption and endeavor to pay the taxes out of their net 
income. In this way the capital of the community is not 
diminished and industry is not disturbed ; while the whole 
effect of the extraordinary expenditure is to cause a simple 
retrenchment in consumption. 

If, however, the extraordinary outlays are met by loans, the 
funds will come from the capital of the community. By this 

1 System der Staatsanleihen, 159 et seq. (1855). 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 845 

process the supply of capital will be reduced, and future pro- 
duction of wealth will be decreased. In this, way society is 
permanently injured ; for the capital thus expended is lost 
beyond recovery since it is destroyed in unproductive consump- 
tion which the state undertakes through its agency. 

If this view were correct, the practice of public borrowing 
w^ould thereby be unconditionally condemned. Fortunately the 
case is altogether otherwise. In Smith's view we encounter 
various fundamental errors of prevailing financial theory : a 
false conception of capital ; a one-sided notion of productivity ; 
and the arbitrary assumption of the existence of such a thing as 
a distinct net income. 

Concerning the first two of these errors, we have already said 
enough ; and so merely refer to the results of the previous dis- 
cussion. ^ The third we have now to examine. "Taxes," it is 
said, '' are paid out of net income," that is, out of that portion ol 
the product of current industry which is not required for the 
maintenance of existing economic conditions, and which, there- 
fore, can be used by the recipient for any purpose he pleases 
and will ordinarily be consumed. This doctrine rests on the 
erroneous conception that economic society is a mechanical 
contrivance which always remains the same, and in which the 
same factors yield every year the same result and ought to do 
so. Industry is conceived of as having two purposes, first, the 
production of goods needed to maintain the existing industrial 
fabric ; and, second, the production of a surplus which, as net 
income, can be used for any purpose desired. 

This view can be founded neither upon human nature as we 
know it nor upon the experience of practical life. The motive 
and purpose of all economic effort is everywhere the one effort 
to satisfy human needs. These needs, however, continually 
advance, of necessity ; and for this reason, advance, progress, 

1 Dietzel had argued that Smith's conception of capital was altogether too narrow. 
Smith defined capital as that part of a person's " stock " which he expects to afford 
him a revenue. Wealth of Nations, Bk. II, ch. i. Dietzel would make the concept 
so broad as to include substantially all the material and immaterial possessions of a 
community. He even called the state a part of the capital of society. System der 
Staatsanleihen, 33-75. Dietzel's second criticism, viz. that Smith had an erroneous 
notion about productivity, has been presented sufficiently in a passage which we have 
already quoted. See § 7. — Ed„ 



846 SELECTED READINGS IN PUBLIC FINANCE 

must be regarded as the fundamental principle of economic 
society. 

What led men to advance beyond the first rude conditions of 
primitive industry, what compelled them gradually to combine 
their labor power and to create capital, what carried them on 
from that rude beginning through so many intermediate stages 
to the present civilization and mastery over nature, is their 
inherent impulse to improve their condition and to satisfy their 
needs ever more completely. All goods newly produced at any 
time have this purpose : they may be immediately consumed, or 
may be used in such a way that they do not yield up the satis- 
factions they afford until a later time. 

The assumption that a part of the product is devoted to the 
satisfaction of necessary wants, that is, to the maintenance of 
existing industry, — and is, therefore, not available for any other 
purpose, — while the other part may be devoted to any purpose 
whatever, is wholly arbitrary. The same is true of the concept 
of free income, which is founded upon this arbitrary assump- 
tion, — free income the disposition of which is less important 
than the disposition of the capital previously accumulated, so 
that its destruction by taxation is a matter of comparatively 
little moment ; while it is thought that to take previously 
accumulated capital in the form of a loan exerts a destructive 
influence upon industry. 

The truth is that all newly produced goods are at the outset 
disposable capital. All are created for the same purpose, the 
immediate or more remote satisfaction of needs; they are 
already destined to be capital, and must, therefore, be con- 
sidered as capital. To take away any part of them is as truly 
a destruction of capital, as the destruction of capital previously 
accumulated would be. . . . 

The ongoing of industry is continuous and without a break. 
It is the result of ceaselessly active forces ; of human activity in 
working over raw materials and of ever-operating natural forces. 
The assumption of distinct periods of production is, for this rea- 
son, a thoroughly arbitrary one, admissible only for convenience 
of representation and logical arrangement. It is, therefore, to 
be confined to these uses alone, since there is nothing in reality 
that corresponds to it. The moment that we try to build an 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 847 

argument upon such a foundation, the assumption then leads to 
an arbitrary severing of the natural course of things ; and error 
is the necessary result. 

This is true of the theory of net income which, of course, 
rests upon the assumption of distinct periods of production, 
since it would be unthinkable otherwise. Net income consists 
of the value of all the goods produced in any period after all 
the costs of production have been deducted, among which is 
included an appropriate allowance for the support of the pro- 
ducers. The surplus value continually produced by industry, 
and called net income, is destined just as little for any sort of 
unproductive employment that may be desired as are the goods 
accumulated prior to any productive period, which are usually 
called capital. The first is destined for the same end as the 
second, namely, under the continuous influence of human labor, 
to be converted into goods capable of satisfying more and more 
completely human wants, and then to be consumed for this 
object Newly produced goods form a homogeneous mass 
with the goods previously produced, the whole being destined 
to serve as the basis of the subsequent industry of the people. 
They have merely this advantage that, in respect to them, 
people are free to choose in what form they will have them 
applied to the production of wealth. The decision of this point 
will depend upon a consideration of the way in which these 
goods will yield the greatest advantage. If they will have a 
greater value when employed in a private business enterprise, 
then it will be disadvantageous to take them for public pur- 
poses ; but it is wholly immaterial whether they were previously 
net income or capital. 

This whole theory of Smith's is at the bottom based upon his 
erroneous view of governmental activity. If one looks upon 
the state as unproductive and considers its operations as a 
destruction of values, then, to be sure, this cost of maintain- 
ing the state can come only from the surplus wealth created 
each year, — that is, will be taken from income, — because other- 
wise the capital and consequently the productive power of the 
community must continually diminish and finally come to an 
end. So far, then, we can say that taxes are paid out of 
income. But, as we have demonstrated, taxes are really a 



848 SELECTED READINGS IN PUBLIC FINANCE 

part of the disposable capital created each year for the purpose 
of being converted by society into those goods which can be 
obtained only in this way. The production of taxes is just as 
good an end of economic activity as the production of any 
other goods. It is, therefore, clearly inadmissible to count 
the goods which protect the body against cold as among the 
costs of maintaining industry, on the ground that they are a 
necessary part of a man's subsistence, and, on the other hand, 
set over against them as " net income " the goods which protect 
personal freedom and industrial activity. 

Equally incorrect, then, is the other half of the doctrine of 
Smith, — that loans are raised from the capital of the commu- 
nity, and therefore impair production and injure the economic 
position of the people. In this proposition the inadequacy and 
faults of the current definition of capital come to light most 
forcibly. Unless we are very much mistaken, this view was 
suggested by the facts, that subscriptions to loans are commonly 
made in large sums while taxes are paid in smaller amounts, and 
that in ordinary life we are accustomed to call the former capital 
since they can at once be loaned at interest while we do not 
consider the latter as capital because they are usually too small 
to find ready investment Where now are we to look for the 
capital which is withdrawn from industry when loans are made. 
Clearly it must be capital already devoted to production since 
only in this case can it affect industry in any injurious manner. 
But it is evident that fixed capital cannot be turned over to the 
state, and this forms the largest and most important part of the 
whole supply of capital. And circulating capital is in the main 
so far advanced toward its conversion into some speciahzed 
form of goods that it is adapted only to the special needs of 
private individuals and not to those of the state. Therefore the 
state can take only that part of capital which is in the form of 
raw materials, or materials slightly transformed, which is still 
free capital and not yet ready for the use of private industry. 
Concerning the most useful disposition of this, it is possible and 
necessary to make a decision. 

Of course this new disposable capital, in conformity with the 
purpose of all economic activity, is usually destined to replace 
the capital that is continually consumed and to make additions 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 849 

to our general store of capital. Under special conditions, how- 
ever, this method of employing new disposable capital may be 
thoroughly inexpedient. This would be the case if, on account 
of decreased demand for goods or because of an urgent demand 
of the state for goods, individual investors find there is no demand 
for their capital and that goods invested under such conditions 
would lose their value as capital. If, in such a case, this dis- 
posable capital is transferred to the state in the form of a public 
loan, it is because the investor had the conviction that it would 
produce a greater value in this employment than it would if 
invested in private industry. The view of the state securing the 
loan was the same ; and the opinion of the two parties to the 
transaction must be assumed to be correct. For no one can 
pretend to judge the value of a good more correctly than the 
person who exchanges it for another. The outward sign accord- 
ing to which the opinion of the two parties is determined, and 
in which it expresses itself, is the rate of interest. 

The disposable capital taken by the state in this way cannot, 
it is true, be employed in private business enterprises. In fact 
no increase of such enterprises can take place, and perhaps even 
the present volume of industry cannot be maintained. . . . But 
the reason for this is not that capital has been taken away, but 
rather the more general circumstance, that now, as a result of 
special conditions, there is less need of goods adapted to the 
immediate satisfaction of wants, and that other goods and other 
employments of capital have for the time a higher value. 
Therefore the employment of disposable capital in private 
enterprises in the production of goods of the sort previously 
wanted, would be useless, and such capital would be lost. 

If, for instance, a dangerous war breaks out, it will be out of 
the question to satisfy new demands for luxuries, and often it 
will be impossible even to satisfy the former demand. It is 
necessary, instead, to secure the means of protecting and pre- 
serving the goods already on hand. A large or even larger 
production of costly silks, for instance, would be inadvisable ; 
and if this occurred, the producers would probably lose money. 
Production of silks, therefore, is suspended or decreased; and 
the disposable capital of silk manufacturers, which under ordi- 
nary conditions would be reinvested in this industry, is loaned to 



850 SELECTED READINGS IN PUBLIC FINANCE 

the government. By the government it is employed in the 
purchase or production of cloth needed to clothe the army, or 
something of a similar nature. In the same way less capital is 
invested in making pleasure carriages, and more ammunition or 
army wagons are built. So, too, the breeding of driving horses 
is checked, and more army horses are bred. 

All these investments of disposable capital serve the purpose 
of procuring the good which is at the moment of the greatest 
value, — protection against foreign enemies or the successful 
termination of a war that has begun. The goods invested in 
this manner preserve their properties as capital, for they are 
converted into goods which represent their value because much 
needed and therefore in demand, 

******* 

With this falls the theory that public loans destroy capital, 
the theory which we meet in the works of most writers. It is, 
apart from the faulty conception of capital which we mentioned 
above, to be considered a necessary consequence of the theory 
that all pubhc consumption is unproductive. We have already 
discussed the falsity of this theory. 

This theory is wrong not only in regard to goods which had 
formerly served another purpose, but are now taken for public 
purposes because these seem to be more important (as in the 
example just given,) and offer the most needed sort of employ- 
ment. But it is also especially wrong in regard to goods that 
pass directly from the disposable capital of the society into the 
hands of the state rather than into private industries. Such 
goods had not yet been used as capital, and in reality first 
became such when used by the state. It is questionable, indeed, 
whether they would have retained their value if they had passed 
into the hands of private enterprises. 

The doctrine that taxes and capital come out of different parts 
of the wealth of the society and consequently exercise different, 
even opposite, effects upon the welfare and development of 
economic society, — because the former do not impair capital 
while the latter do impair it, — is wholly untenable. It is based 
upon an arbitrary separation of things naturally similar and in- 
separable. Both taxes and loans flow in the same manner from 
the disposable capital of society, and only the purposes for 



THE ECONOMIC EFFECTS OF PUBLIC DEBTS 851 

which they are employed give rise to a fundamental distinction 
between them. 

(Dietzel then proceeds to enlarge upon the advantages of 
public loans. They enable governments, he says, to raise large 
sums of money very quickly ; make it unnecessary to increase 
taxation to an injurious extent; encourage saving; enable a 
country to draw on the resources of foreign investors ; enable a 
government to place part of an extraordinary burden upon future 
generations ; increase production ; and add to the wealth of a 
country. — Ed.) 



CHAPTER XXIV 

SHOULD A NATIONAL DEBT BE PAID ? 

92. The Views of Mill. — The desirability of redeeming a 
national debt was urged by Mr. Mill as follows : ^ 

When a country, wisely or unwisely, has burthened itself with 
a debt, is it expedient to take steps for redeeming that debt ? 
In principle it is impossible not to maintain the affirmative. It 
is true that the payment of the interest, when the creditors are 
members of the same community, is no national loss, but a mere 
transfer. The transfer, however, being compulsory, is a serious 
evil, and the raising a great extra revenue by any system of 
taxation necessitates so much expense, vexation, disturbance of 
the channels of industry, and other mischiefs over and above 
the mere payment of the money wanted by the government, 
that to get rid of the necessity of such taxation is at all times 
worth a considerable effort. The same amount of sacrifice 
which would have been worth incurring to avoid contracting the 
debt, it is worth while to incur, at any subsequent time, for the 
purpose of extinguishing it. 

Two modes have been contemplated of paying off a national 
debt : either at once by a general contribution,^ or gradually by 
a surplus revenue. The first would be incomparably the best, 
if it were practicable ; and it would be practicable if it could 
justly be done by assessment on property alone. If property 
bore the whole interest of the debt, property might, with great 
advantage to itself, pay it off ; since this would be merely sur- 
rendering to a creditor the principal sum, the whole annual 
proceeds of which were already his by law ; and would be 

1 Principles, Bk. V, ch. 7, §§ 2-3. 

2 Ricardo and others had advocated such a policy. C/. Rxardo, Principles of 
Political Economy and Taxation, ch. 17. — Ed. 

852 



SHOULD A NATIONAL DEBT BE PAID? 853 

equivalent to what a landowner does when he sells part of his 
estate, to free the remainder from a mortgage. But property, 
it needs hardly be said, does not pay, and cannot justly be re- 
quired to pay, the whole interest of the debt. Some indeed 
affirm that it can, on the plea that the existing generation is 
only bound to pay the debts of its predecessors from the assets 
it has received from them, and not from the produce of its own 
industry. But has no one received anything from previous 
generations except those who have succeeded to property.'' Is 
the whole difference between the earth as it is, with its clearings 
and improvements, its roads and canals, its towns and manufac- 
tories, and the earth as it was when the first human being set 
foot on it, of no benefit to any but those who are called the 
owners of the soil.'* Is the capital accumulated by the labor 
and abstinence of all former generations of no advantage to any 
but those who have succeeded to the legal ownership of part 
of it f And have we not inherited a mass of acquired knowl- 
edge, both scientific and empirical, due to the sagacity and 
industry of those who preceded us, the benefits of which are the 
common wealth of all .-* Those who are born to the ownership 
of property have, in addition to these common benefits, a sepa- 
rate inheritance, and to this difference it is right that advertence 
should be had in regulating taxation. It belongs to the general 
financial system of the country to take due account of this 
principle, and I have indicated, as in my opinion a proper mode 
of taking account of it, a considerable tax on legacies and inherit- 
ances. Let it be determined directly and openly what is due 
from property to the state, and from the state to property, and 
let the institutions of the state be regulated accordingly. What- 
ever is the fitting contribution from property to the general ex- 
penses of the state, in the same, and in no greater proportion, 
should it contribute toward either the interest or the repayment 
of the national debt. 

This, however, if admitted, is fatal to any scheme for the 
extinction of the debt by a general assessment on the commu- 
nity. Persons of property could pay their share of the amount 
by a sacrifice of property, and have the same net income as 
before ; but if those who have no accum.ulations, but only in- 
comes, were required to make up by a single payment the equiva- 



854 SELECTED READINGS IN PUBLIC FINANCE 

lent of the annual charge laid on them by the taxes maintained 
to pay the interest of the debt, they could only do so by incur- 
ring a private debt equal to their share of the public debt ; while, 
from the insufficiency, in most cases, of the security which they 
could give, the interest would amount to a much larger annual 
sum than their share of that now paid by the state. Besides, a 
collective debt defrayed by taxes, has over the same debt par- 
celed out among individuals, the immense advantage, that it is 
virtually a mutual insurance among the contributors. If the 
fortune of a contributor diminishes, his taxes diminish; if he is 
ruined, they cease altogether, and his portion of the debt is 
wholly transferred to the solvent members of the community. 
If it were laid on him as a private obligation, he would still be 
liable to it even when penniless. 

When the state possesses property, in land or otherwise, which 
there are not strong reasons of public utility for its retaining at 
its disposal, this should be employed, as far as it will go, in 
extinguishing debt. Any casual gain, or godsend, is naturally 
devoted to the same purpose. Beyond this, the only mode 
which is both just and feasible, of extinguishing or reducing a 
national debt, is by means of a surplus revenue. 

The desirableness, per se, of maintaining a surplus for this 
purpose does not, I think, admit of a doubt. We sometimes, 
indeed, hear it said that the amount should rather be left to 
'' fructify in the pockets of the people." This is a good argu- 
ment, as far as it goes, against levying taxes unnecessarily for 
purposes of unproductive expenditure, but not against paying 
off a national debt. For, what is meant by the word " fructify " } 
If it means anything, it means productive employment ; and as 
an argument against taxation, we must understand it to assert, 
that if the amount were left with the people, they would save it, 
and convert it into capital. It is probable, indeed, that they 
would save a part, but extremely improbable that they would 
save the whole : while if taken by taxation, and employed in 
paying off debt, the whole is saved, and made productive. To 
the fundholder who receives the payment it is already capital, 
not revenue, and he will make it '^fructify," that it may con- 
tinue to afford him an income. The objection, therefore, is not 
only groundless, but the real argument is on the other side; the 



SHOULD A NATIONAL DEBT BE PAID? 855 

amount is much more certain of fructifying if it is not "left in 
the pockets of the people." 

It is not, however, advisable in all cases to maintain a surplus 
revenue for the extinction of debt. The advantage of paying 
off the national debt of Great Britain, for instance, is that it 
would enable us to get rid of the worse half of our taxation. 
But of this worse half some portions must be worse than others, 
and to get rid of those would be a greater benefit proportionally 
than to get rid of the rest. If renouncing a surplus revenue 
would enable us to dispense with a tax, we ought to consider 
the very worst of all our taxes as precisely the one which we 
are keeping up for the sake of ultimately abolishing taxes not so 
bad as itself. In a country advancing in wealth, whose increas- 
ing revenue gives it the power of ridding itself from time to 
time of the most inconvenient portions of its taxation, I conceive 
that the increase of revenue should rather be disposed of by 
taking off taxes, than by liquidating debt, as long as any very 
objectionable imposts remain. In the present state of England, 
therefore, I hold it to be good policy in the government, when 
it has a surplus of an apparently permanent character, to take 
off taxes, provided these are rightly selected. Even when no 
taxes remain but such as are not unfit to form part of a perma- 
nent system, it is wise to continue the same policy by experi- 
mental reductions of those taxes, until the point is discovered at 
which a given amount of revenue can be raised with the small- 
est pressure on the contributors. After this, such surplus 
revenue as might arise from any further increase of the produce 
of the taxes, should not, I conceive, be remitted, but applied to 
the redemption of debt. Eventually, it might be expedient to 
appropriate the entire produce of particular taxes to this pur- 
pose ; since there would be more assurance that the liquidation 
would be persisted in, if the fund destined to it were kept apart, 
and not blended with the general revenues of the state. The 
succession duties would be peculiarly suited to such a purpose, 
since taxes paid as they are, out of capital, would be better 
employed in reimbursing capital than in defraying current 
expenditure. If this separate appropriation were made, any 
surplus afterward arising from the increasing produce of the 
other taxes, and from the saving of interest on the successive 



856 SELECTED READINGS IN PUBLIC FINANCE 

portions of debt paid off, might form a ground for a remission 
of taxation. 

It has been contended that some amount of national debt is de- 
sirable, and almost indispensable, as an investment for the savings 
of the poorer or more inexperienced part of the community. Its 
convenience in that respect is undeniable ; but (besides that the 
progress of industry is gradually affording other modes of 
investment almost as safe and untroublesome, such as the 
shares or obligations of great public companies) the only real 
superiority of an investment in the funds consists in the national 
guarantee, and this could be afforded by other means than that 
of a public debt, involving compulsory taxation. One mode 
which would answer the purpose, would be a national bank of 
deposit and discount, with ramifications throughout the country ; 
which might receive any money confided to it, and either fund 
it at a fixed rate of interest, or allow interest on a floating 
balance, like the joint stock banks ; the interest given being, of 
course, lower than the rate at which individuals can borrow, in 
proportion to the greater security of a government investment ; 
and the expenses of the establishment being defrayed by the 
difference between the interest which the bank would pay, and 
that which it would obtain, by lending its deposits on mercantile, 
landed, or other security. There are no insuperable objections 
in principle, nor, I should think, in practice, to an institution of 
this sort, as a means of supplying the same convenient mode of 
investment now afforded by the public funds. It would con- 
stitute the state a great insurance company, to insure that part 
of the community who live on the interest of their property, 
against the risk of losing it by the bankruptcy of those to whom 
they might otherwise be under the necessity of confiding it. 

93. The Views of H. C. Adams. — This important question is 
discussed further by Professor H. C. Adams : ^ 

The poUcy adopted by the United States with regard to the 
expungement of its obHgations is not of wide acceptance. From 
the time that Gallatin assumed control of the federal treasury 

1 Public Debts, 240-247 (New York, D. Appleton and Company, 1887). Re- 
printed with consent of the authox and the publishers. 



SHOULD A NATIONAL DEBT BE PAID? 857 

to the present, the American people have manifested a strong 
dislike to the perpetuation of a funded debt, but in other 
countries this sentiment has failed to find response. It is true 
that England and Holland appear to appreciate the arguments 
for the extinction of public obligations ; but the Latin peoples, 
whether in Europe or in South America, as well as those people 
of Eastern and Asiatic civilization who have come in contact 
with and imitate European manners, do not attach much impor- 
tance to the necessity of reducing the principal of their debts. 
It thus appears that the advisability of debt payment admits of 
serious discussion. 

Yet it should be clearly discerned at the beginning that this 
discussion does not turn upon a question of principle, but has 
wholly to do with methods of procedure. It is now universally 
admitted that a debt can only be paid out of surplus revenue, 
and all financiers readily accede to the proposition that financial 
burdens at any time imposed upon the industries of a country 
should be as light as possible. The real point in controversy 
pertains to the best way of attaining this end, a statement that 
may be easily understood if we consider for a moment the 
elements that go to make up the burden of a debt. 

The constituent elements of this burden are the principal of 
the debt, or the amount to be paid ; the annuity occasioned by 
the debt, or the annual interest demanded ; and the industrial 
condition of the country, or the underpinning of the debt. This 
factor last mentioned should receive due recognition, since the 
argument in favor of perpetual indebtedness rests upon an over- 
estimation of its importance ; and it must be conceded that the 
true conception of a burden of any sort brings to mind not 
merely the weight carried, but compares that weight with the 
strength of him who carries it. It is at this point that the two 
schools of finance part company. The one would reduce the 
burden of the debt by extinguishing its principal, the other 
would accomplish the same purpose by developing national 
resources. 

There are two classic arguments put forth by those who defend 
the policy of perpetual indebtedness. It is claimed, in the first 
place, that the pressure of a public debt is necessarily decreased 
from year to year by the gradual depreciation in the value of 



858 SELECTED READINGS IN PUBLIC FINANCE 

the monetary unit in which all obligations are expressed ; this 
depreciation being the result of constant additions made to the 
amount of money material, and of continued development of 
the mechanism of exchange. This argument, however, does 
not call for extended consideration. The fact which it states 
as a general fact, taking into view the variations of the precious 
metals from century to century, cannot be denied, although there 
is some reason for believing that the tendency of gold to fall 
in value has, at the present time, received a temporary check. 
But without relying upon such a suggestion for our decision, it 
certainly seems that gradual depreciation is too tardy in its 
workings to be worthy of serious consideration. Before the 
burden of a debt, like that, for example, which the United 
States is bearing, could be sensibly diminished through depre- 
ciation in the value of the monetary unit, an addition of a 
tenth of one per cent to the annual interest payments would 
have extinguished the principal. 

The second argument for perpetual indebtedness is worthy 
more serious consideration. Why, it is asked, should a people 
bear a high rate of taxation for the purpose of reducing the 
principal of a debt, when all the practical effects of debt reduc- 
tion may be realized through the natural growth and prosperity 
of the nation .'' A wise policy, it is claimed, demands that the 
entire energy of the country be given to the development of 
industries, and to the increase of wealth and numbers ; since 
the financial ability of the country may in this manner be so 
greatly enhanced that the pressure of the debt will cease to be 
felt. The experience of England is often cited in support of 
this view. The pressure of her debt in 181 5 is computed as 
equivalent to 9 per cent of her yearly income; in 1880 it was 
observed to be less than 3 per cent ; but this reduction had 
been effected not by the expungement of her obligations but 
by the growth of national wealth. The actual result, so far as 
debt burden is concerned, is the same as though two thirds of 
the principal had been paid while the amount of her wealth 
remained stationary. In France, also, one may discover the 
working of the same principle, although in this instance the 
pressure of the debt remained constant, or is increased very 
slightly, while the capital sum of her obligations has greatly 



SHOULD A NATIONAL DEBT BE PAID? 859 

increased. Thus the capitalized sum of the French debt was in 
1840 $850,000,000, in 1870 it was $2,759,000,000; but the pres- 
sure of the annual payments demanded by these debts, computed 
upon the national income for the respective periods, is found to 
be .022 and .023. That is to say, the national income of France 
increased at a rate nearly as rapid as that of her debt, notwith- 
standing the extravagances of the empire. But it should, per- 
haps, be added, that this favorable exhibit has been destroyed 
by the financial disasters occasioned by the Franco-Prussian war. 

It is upon such facts as these that the common argument in 
support of the policy of perpetual indebtedness is based, and, 
so far as the facts are concerned, there is no room for contro- 
versy. But the conclusion of the argument may not be so 
readily accepted, for, if it can be shown that the payment of 
the principal of a debt has no tendency to retard the industrial 
development of a nation, the entire course of reasoning falls to 
the ground. As opposed to the idea from which this reason- 
ing must proceed, I venture to place the following proposition, 
which, if maintained, will furnish an incontrovertible argument 
in favor of the policy which the United States has adopted : 

TJie payment of the principal of a debt tends neither to impov- 
erish a nation nor to j^etard ii^s material development ; but, on the 
other hand, the maintenance of tJie principal and tJie constant pay- 
me7it of accruing interest tefid to cripple the prodtictive capacity 
of any people. 

The two parts of this proposition should receive separate at- 
tention, and we are led first to inquire if the industries of a coun- 
try are injuriously affected by the process of payment. It is 
admitted by all that somewhere in the course of deficit financier- 
ing — either at the time the debt was established, or during the 
period that it was carried, or at the date of its payment — a 
loss is sustained chargeable^to the adoption of the loan policy. 
Should one reason from the analogy of private debts, he will 
conclude that this burden is borne at the time when the debt is 
paid ; for when an individual debtor clears himself from obliga- 
tions, he loses control over a certain amount of capital, and conse- 
quently lessens his importance as a member of industrial society. 
But such reasoning cannot be applied to the state. The state is 
not an individual, it has no life separate from the united lives of 



86o SELECTED READINGS IN PUBLIC FINANCE 

all citizens, and it recognizes no interest but the collective inter- 
est of society. The state is the corporate representative of all 
citizens, creditors as well as debtors, and is not at all interested 
in the proprietary residence of capital, provided only it be judi- 
ciously employed. Since, then, the payment of its own obliga- 
tions effects no more than a transfer of control over capital from 
one set of men to another, it cannot be said that the industrial 
development of the country is thereby obstructed. 

The position here assumed may be easily understood if one 
hold firmly in mind the nature of capital. Capital is subsistence 
fund, and he w^ho controls it has it in his power to direct labor. 
It is capital which the state wants when it borrows money, and 
in borrowing capital it draws to its own use that which, had it 
not been thus appropriated, might have been applied to some 
productive industry under private management. The obliga- 
tions which the state creates against itself are written in the 
language of money, because this is the most convenient language 
known for the expression of indebtedness ; but the state has no 
use for money except to effect the transfer to itself of control 
over existing capital. 

Suppose a state to borrow a billion dollars ; it cannot be said 
that industrial society is thereby necessarily rendered any the 
poorer. Capital is not destroyed by the borrowing. Before the 
loan was filled, the nation was possessor of a certain amount of 
capital, distributed in a thousand funds and under the direction 
of a thousand wills ; after the loan the nation as a whole holds 
the same amount of capital as before, the only difference being 
that control over it has passed to the state. Whether or not this 
operation is industrially detrimental depends upon the use to 
which the state puts the proceeds of its loan. If it be con- 
sumed in the prosecution of a war, the nation is impoverished 
to the extent of the unproductive coiisumption, since capital, in 
the form of bacon, flour, clothes, implements, mules, and the like, 
has been destroyed. We may, then, conclude that the injury 
sustained on account of a loan for war purposes is sustained at 
the time the loan was contracted, and is due to the fact that the 
state has caused a certain amount of capital to disappear with- 
out hope of recovery. 

Ixt us now turn to the process of payment. The obligations 



SHOULD A NATIONAL DEBT BE PAID? 86 1 

which the state has created against itself call for the payment 
of a certain amount of money. The money, which it obtains 
by means of taxation, is held for a moment, then transferred 
to the public creditors, and in this manner the state becomes 
absolved from its indebtedness. It would of course be incorrect 
to say that this transfer of money from one set of citizens to 
another does not in the least disturb capital, for possession of 
money is the evidence of ownership in capital; but it may be 
rightly claimed that it does not destroy capital. Before the 
payment, one set of individuals controlled the subsistence 
fund of the country to the extent of the payment; after the 
extinction of the debt, ownership rests with another set of indi- 
viduals. The government is freed from the necessity of pro- 
viding an annual sum in the form of interest, and, measured by 
the amount of capital in the country, the nation is in no wise 
impoverished. There is the same amount of food for the sub- 
sistence of laborers, and the same amount of raw stuffs upon 
which to set them at work. If the new masters of capital are 
as enterprising as the old, the nation loses nothing by the pay- 
ment of its debt. This is the explanation, and in the explana- 
tion lies the defense, of the proposition that the payment of a 
public debt does not necessarily impoverish a nation. The 
injury to industrial society is worked by the destruction of capi- 
tal at the time the loan was contracted ; the labor required to 
create again the capital thus destroyed constitutes the burden 
imposed upon the nation; the payment of the principal of the 
debt is at most but a readjustment of ownership in existing 
capital. It is a fallacy to argue that the expungement of public 
obligations destroys capital. 

But how is a people impoverished by the maintenance of the 
principal of a debt ? In so far as bondholders live from the 
proceeds of their bonds, they form a class not immediately 
interested in current industries. At some time in the past they 
may have furnished the government with large sums of capital, 
thus averting the inconvenience of excessive taxation or of a 
sudden change in rates; and, in return for this service, they 
received from the government the promise of an annuity until 
an equivalent of the original capital should be returned. Such 
persons are guaranteed a living without labor. 



862 SELECTED READINGS IN PUBLIC FINANCE 

There is but one way in which the government may escape 
the necessity of supporting in idleness this class, and that is by 
paying its members their respective claims. The bondholders 
would in this manner be deprived of their secured annuity, but 
they would in its stead hold a sum of free capital ; and if they 
wish to continue in the enjoyment of an income from their 
property, they must apply their funds to some productive pur- 
pose. In this manner the country gains by bringing to bear 
upon industrial affairs the interested attention of those who 
formerly were secured a living from the proceeds of public 
taxes. For another reason also is the payment of a debt advan- 
tageous. No people can long retain that hopefulness so essen- 
tial to the vigorous prosecution of industries if the past lays 
heavy claims upon the present. As a rule, they only should 
partake of current product who are in some way connected with 
present production. Carelessness and jealousy are not char- 
acteristics of efficient labor, but they are sentiments naturally 
engendered by the payment of taxes for the support of a fa- 
vored class. It is the permanency of this payment, rather than 
its amount, which exerts a depressing influence upon labor, and 
its extinction is a first step toward the establishment of con- 
fidence and contentment. It is for such reasons as these that 
we conclude that the policy of debt payment vigorously prose 
cuted will assist rather than retard industrial development 



CHAPTER XXV 
SINKING FUNDS 

94. The Theories of Dr. Price. ^ — During the eighteenth century 
various attempts had been made, as described by Adam Smith, 
to reduce the British debt by creating a sinking fund. These 
efforts proved ineffectual for various reasons, and finally Dr. 
Richard Price came forward with what was generally believed 
to be a demonstration of the efficacy of a permanent sinking 
fund inviolably pledged and applied to the extinction of a 
pubHc debt. His theories found favor with the younger Pitt, 
and were embodied in a new sinking-fund law of 1786, known 
as Pitt's sinking fund. This act set aside ;£ 1,000,000 per year 
to be placed in the hands of sinking-fund commissioners, who 
were to apply it to the purchase of the national debt, and then 
to draw from the treasury interest on stock thus purchased and 
apply that to further purchases. It was intended that this 
should continue until the interest on the stock purchased 
(redeemed) and held by the commissioners should equal 
;£4,ooo,ooo ; when, with the ;£i, 000,000 annual appropriation, 
the sinking fund would amount to ^5,000,000 a year.^ 

The theory upon which this was done is most clearly set 
forth by Dr. Price in his Appeal to the PubHc on the Subject 
of the National Debt. The gist of his argument is contained 
in the following extracts : 

^ Dr. Richard Price (1723-91) was a dissenting clergyman and a well-known 
writer upon a variety of subjects. His principal works dealing with the theory of 
sinking funds were: Observations on Reversionary Payments (1769) and An Appeal 
to the Public on the Subject of the National Debt (second edition, 1772). We quote 
from the latter publication. 

2 See Palgrave, Dictionary of Political Economy, HI, 405 et seq. 

^6^ 



864 SELECTED READINGS IN PUBLIC FINANCE 

A Sinking Fzmd, according to the most general idea of it, 
signifies " any Saving or Sicrphis, set apart from the rest of the 
annual income, and appropriated to the purpose of paying off 
or sinking debts." 

There are three ways in which a kingdom may apply such a 
saving. 

1st. The interests disengaged from time to time by the pay- 
ments made with it, may be themselves applied to the payment 
of the public debt. 

Or, 2dly, They may be spent on current services. 

Or, '^dly, They may be immediately annihilated by abolishing 
the taxes charged with them. 

In the first way of employing a Sinking Fund^ it becomes a 
fund always increasing itself. Every new interest disengaged 
by it, containing the same powers with it, and joining its opera- 
tion to it; and the same being true of every interest disengaged 
by every interest, it must act, not merely as an increasing force, 
but with a force the increase of which is continually accelerated ; 
and which, therefore, however small at first, must in time, be- 
come equal to any effect. In the second way of applying a 
Sinking Fund, it admits of no increase, and must act forever 
with the same force. — In other words, A Sinking Fimd, accord- 
ing to the first method of applying it, is, if I may be allowed 
the comparison, like a grain of corn sown, which, by having its 
produce sown and the produce of that produce and so on, is 
capable of an increase that will soon stock a province or sup- 
port a kingdom. — On the contrary. A Sinking Fund, accord- 
ing to the second way of applying it, is like a seed the produce 
of which is consumed ; and which, therefore, can be of no fur- 
ther use, and has all its powers destroyed. 

T\i^ former, be its income at first ever so much exceeded by the 
new debts incurred annually, will soon become superior to them 
and cancel them. — The latter, if at first inferior to the new 
debts incurred annually, will forever remain so ; and a state that 
has no other provision for the payment of its debts, will be 
always accumulating them until it sinks. 

What has been now said of the second mode of applying a 
fund is true in a higher degree of the third. For in this case, 
the disengaged interests, instead of being either added to the 



SINKING FUNDS 865 

fund, or spent from year to year on useful services, are imme- 
diately given up. 

In short, a fund of the first sort is money bearing compound 
interest — A fund of the second sort is money bearing sim- 
ple interest — And a fund of the third sort is money bear- 
ing no interest — The difference between them is, therefore,, 
properly infinite. And this is so evident, that I cannot go on 
with this explanation without some reluctance. I will, however, 
rely on the candour of those who must be already abundantly 
convinced, while I endeavour to illustrate these observations by 
the following example. 

Let us suppose a nation to be capable of setting apart the 
annual sum of 200,000/. as a fund for keeping the debts it is 
continually incurring in a course of redemption ; and let us con- 
sider what its operation will be, in the three ways of applying it 
which I have described, supposing the public debts to bear an 
interest of 5 per cent and the period of operation %6 years. 

A debt of 200,000/. discharged the first year, will disengage 
for the public an annuity of 10,000/. If this annuity, instead 
of being spent on current services, is added to the fund, and 
both employed in paying debts, an annuity of 10,500/ will be 
disengaged the j^^^;^^ year, or of 20,500/. in both years. And 
this again, added to the fund the third year, will increase it to 
220,500/.; with which an annuity will then be disengaged of 
11,025/; and the stem of the disengaged annuities will be 
31,525/. : which added to the fund the fourth year, will increase 
it to 231,525/., and enable it then to disengage an annuity of 
11,576/. 5^-. and render \h.Q sum of the disengaged annuities in 
four yo^dixs, 43,101/. 5^". — Let any one proceed in this way, and 
he may satisfy himself, that the original Fund, together with 
the sum of the annuities disengaged, will increase faster and 
faster every year, till, in %6 years, XhQfimd becomes 13,283,414/. 
and the stun of the disengaged annuities 13,083,414/ — The 
full value, therefore, at ^percent, of an annuity of 13,083,414/. 
will have been paid in %6 years, that is, very nearly, 262 miUions 
of debt ; And, consequently, it appears, that tho' the state had 
been all along adding every year to its debts three millions ; that 
is tho' in the time supposed it had contracted a debt of 258 
millions, it would have been more than discharged, at no greater 



866 SELECTED READINGS IN PUBLIC FINANCE 

expence than an annual saving of 200,000/. — But if the same 
fund had been employed in the second of the three ways I have 
described, the annuity disengaged by it would have been every 
year 10,000/. ; and the sum of the annuities disengaged would 
have been Z6 times 10,000/. or 860,000/. ; — The discharged 
debt, therefore, would have been no more than the value of such 
an annuity, or 17,200,000/. But besides this, it must be con- 
sidered, that there will be an expense saved, in consequence of 
applying every year the disengaged annuities to current services, 
for which otherwise equivalent sums must have been provided 
by new taxes, or assessments; 10,000/. will be saved at the 
beginning of the second year ; 20,000/. at the beginning of the 
third; 30,000/. at the beginning of th.Q fotcrih ; and 850,000/. 
at the beginning of the 86th year ; and the sum of all these sav- 
ings is 36,550,000/. which, added to 17,200,000/., the debt dis- 
charged, makes 53,750,000/. Subtract the last sum from 262 
millions, and 208,250,000/. will be the complete loss of the 
public arising, in ^6 years, from employing an annual sum of 
200,000/. in the second way rather than the first. 

Little need be said of the effect of the same fund applied in 
the third way. It is obvious that the whole advantage derived 
from it, would be the discharge of a debt of 200,000/. annually ; 
or of 17,200,000/. in all. 

Similar deductions might be made on the supposition of lower 
rates of interest and shorter periods. — Thus ; let a state be 
supposed to run in debt two millions annually, for which it pays 
/\perce7it. interest In 70 years, a debt of 140 millions would 
be incurred. But an appropriation of 400,000/. per ann., if 
employed in \}i\^ first way, would, at the end of this term, leave 
the nation beforehand, six millions ; whereas,' if applied in the 
second way, the nation would be left in debt, 73 millions; and 
in the third y^2iy, T12 millions. 

******* 

But it is time to enter into a more explicit confutation of the 
plea commonly used to justify the alienation of the Sinking 
Fund, and which has been mentioned at the beginning of this 
Essay. 

This alienation, it is well known, is become a fixed measure of 
Government among us. We owe it to our present heavy debt, 



SINKING FUNDS 86/ 

and if continued much longer, there will, I am afraid, be no 
possibility of escaping some of the worst calamities. It is, there- 
fore, necessary that the reason on which it has been grounded, 
should be particularly examined and refuted. And in order to 
do this, I must beg leave to bring again to view some of the 
preceding observations. 

There is, let us suppose, a million wanted for the necessary 
supplies of the year. It lies ready in the Sinking Fnnd, and a 
minister, in order to obtain leave to seize it, pleads, " That, since 
such a sum must be had, it is indifferent whether it is taken 
from hence, or procured by making a new loan. If the former 
is done, an old debt will be continued. If the latter is done, an 
equal new debt will be incurred, which would have been other- 
wise saved ; and the public interest can be no more affected by 
one of these than the other. But the former is easiest. And it 
will save the disagreeable necessity of laying on a new tax."-— 
This argument appears plausible : and it has never yet failed of 
success. — But what must prove the consequence ? — If such 
reasoning is good one year, it is good every year ; and warrants 
a total alienation of the Sinking Fund, if the annual expences of 
Government are such as always to require a sum equal to its 
income. And thus, it will lose its whole efficacy ; and a Fund 
that, if not alienated, would have been omnipotent, will be con- 
verted into just such a feeble and barren one, as the second ox 
third in the former account. 

The fallaciousness of this argument consists in the supposi- 
tion, that no loss can arise to the Public from continuing an old 
debt, when it cannot be discharged without incurring an equal 
new debt. — I have demonstrated this to be a mistake ; and that 
by practising upon it, or alienating rather than borrowing, an 
infinite loss may be sustained. — Agreeably to this, I have in 
the Treatise on Annuities shewn, that had but 4<DO,ooo/. per 
annum oi the Sinking Fund been applied, from the year 1716 
inviolably, three millions per annum of our taxes might now have 
been annihilated. 

I will here add, that had the whole produce of it been thus 
employed, we might now have been in possession of a very con- 
siderable surplus, instead of being in debt, a hundred and 
forty millions. — But I will go farther. — Had even the money 



868 SELECTED READINGS IN PUBLIC FINANCE 

that, at different times, has been employed in paying off our 
debts, been apphed but in a different manner; that is, had it 
been made the produce of a Sinking Fund, which, from 1716 to 
the present year, had never been alienated ; above half our 
present debts would have been cancelled. — Such is the impor- 
tance of merely the inajiner of applying money. — Such is the 
prodigious difference, in the present case, between borrowing 
and alienating. — Nor is there anything in this mysterious. The 
reason has been sufficiently explained. — When a state borrows, 
it pays, I have said, only simple interest for money. When it 
alienates a Fund appropriated to the payment of its debts, it 
loses the advantage of money, that would have been otherwise 
improved necessarily at compound interest. And can there be 
any circumstances of a State which can render the latter of these 
preferable to the former.? Or can the inconveniences, which 
may attend the imposition of a new tax, deserve in this case to 
be mentioned 1 What a barbarous policy is that which runs a 
Kingdom in debt, Milliofis, in order to save Tkousaiids ; which 
robs the Public of the power of annihilating all taxes in order to 
avoid a small present increase of taxes ? — This, in truth, has been 
our policy ; and it would be affronting common sense to attempt 
a vindication of it. 

I confess myself incapable of speaking on this subject with 
calmness. — Let the Reader think of the facts I have mentioned : 
let him consider the difference in our favour, which an inviolable 
application of the Sinking Fund would have made : Let him 
compare what, in that case, we should have been, with what we 
are ; and let him, if he can, be unmoved. 

******* 

From these observations the truth of the following assertion 
will be very evident. 

"A State may, without difficulty, redeem all its debts by 
borrowing money for that purpose, at an equal or even any 
higher interest than the debts bear ; and without providing any 
other Funds than such small ones, as shall from year to year 
become necessary to pay the interest of the sums borrowed." 

For Example. Suppose our Parliament, 56 years ago, had 
resolved to borrow half a million annually for the purpose of 
redeeming the debts of the kingdom. The National Gain, sup- 



SINKING FUNDS 869 

posing the money applied, without interruption, to the redemp- 
tion of debts bearing 4 per cent, interest, would have been a 
hundred millions, being debt redeemed, or the sum nearly to 
which an annuity of half a million will accumulate in 56 years. 
— On the other hand. The National Loss would have been 
twenty-eight millions ; being debt incicrred, or the sum of all the 
loans. — The balance, therefore, in favour of the nation, would 
have been seventy -two millions. — During this whole period, the 
revenue account would have been the same that it has been, 
except that it would have been charged, towards paying the 
interest of the money borrowed, with an annuity increasing at 
the rate of 20,000/. every year. In the present year, therefore, 
this annuity would have been 55 times 20,000/., or 1,100,000/. 
But it should be remembered, that 100 millions having been 
redeemed, the kingdom might have been now eased of the annual 
expence of four millions. 

Again, Suppose only half a million annually to be now capa- 
ble of being spared from the Sinking Fund. This, if applied 
to the redemption of the 3 per cents, at par, would pay off no 
more than 61 millions in 52 years. But let half a million be 
borrowed annually, for only 23 years to come ; and 99 millions 
will be redeemed in the same time. That is ; 38 millions more 
than could have been otherwise redeemed, at the extraordinary 
expence of only eleven millions and a half. 

War, while such a scheme was going on, would increase its 
efficiency ; and any suspension of it then, would be the madness 
of giving it a mortal stab, at the very time it was making the 
quickest progress towards the accomplishment of its end. — 
Suppose, for instance, that, within the period I have mentioned, 
two wars should happen ; one to begin five years hence, and to 
last 10 years ; the other to begin 35 years hence, and to last 
also 10 years, and both raising the interest of money in the Funds 
to 4\ per cent. It may be easily calculated, that on these sup- 
positions 145 millions, instead of 99 millions, would be paid off 
by such a scheme. But, should it be suspended during the con- 
tinuance of the two wars, it would in the same time (that is, in 
52 3^ears) pay off no more than 40 millions. 

I know these Observations will look more like visions than 
realities, to those who have never turned their thoughts to these 



870 SELECTED READINGS IN PUBLIC FINANCE 

subjects ; or who have not duly attended to the amazing increase 
of money, bearing compound interest. — The duration of the 
lives of mdividuals is confined within limits so narrow, as not 
to admit, in any great degree, of the advantages that may be 
derived from this increase. But a period of 50, or 60, or 100 
years being little in the duration of kingdoms, they are capable 
of securing them in almost any degree: And if no kingdoms 
should ever do this ; if, in particular, a nation in such circum- 
stances as ours, should continue to neglect availing itself of 
them : one fact will be added to the many in the political world, 
which tho' they cannot sicrprize a philosophical person, he must 
consider with concern and regret. 

Money bearing compound interest increases at first slowly. 
But, the rate of increase being continually accelerated, it becomes 
in some time so rapid, as to mock all the powers of the imagina- 
tion. — One penny, put out at our Saviour's birth to 5 per cerit. 
compotmd interest, would, before this time, have increased to a 
greater sum, than would be contained in a hnndred and fifty 
millions of earths, all solid gold. — But put out to simple in- 
terest, it would, in the same time, have amounted to no more 
th3.n seven shillings and foiLr pence half-penny. — Our govern- 
ment has hitherto chosen to improve money in the last, rather 
than \^Q first of these ways. 

Many schemes have at different times been proposed for 
paying off the National Debt. But the inventors of them might 
have spared their labour. Their schemes could not deserve the 
least notice. The best scheme has been long known. It has 
been established; but, unhappily for this kingdom, it was crushed 
in its infancy. Still, however, if our deliverance is possible, it 
must be derived from hence. The strictest mathematical evi- 
dence proves, that the nature of things don't admit of any 
method of redeeming public debts so expeditious and effectual. — 
Restore, then, the Sinking Fiind. And if the zvhole of it cannot 
be unalienably applied to its original use, let some part of it be 
so applied ; that the nation may, at least, enjoy a cJiance of 
being saved. — "The Sinking /7/;/^( says a great writer) is the last 
resort of the nation ; its only domestic resource, on which must 
chiefly depend all the hopes we can entertain of ever discharg- 
ing or moderating our encumbrances. And, therefore, the 



SINKING FUNDS 871 

prtcdent application of the large sums now arising from this 
fund, is a point of the utmost importance, and well worthy the 
serious attention of Parliament." I should offer an injury to 
truth, were I to say no more, than that I have pointed out the 
most pmdent appHcation of this fund. I am persuaded that I 
have pointed out the only application of it, that can do us any 
essential service. Time must discover whether the Parliament 
will think it worthy of any attention. 

95. A Criticism of Dr. Price, by Robert Hamilton. — In 18 13 

Robert Hamilton, Professor of Natural Philosophy in the Uni- 
versity of Aberdeen, published an elaborate refutation^ of 
Dr. Price's theories. Hamilton begins by laying down the 
following " General Principles of Finance " : 

I. The annual income of a nation consists of the united 
produce of its agriculture, manufactures, and commerce. This 
income is the source from which the inhabitants derive the 
necessaries and comforts of life ; distributed, according to their 
stations, in various proportions ; q^d from which the public 
revenue, necessary for internal administration, or for war, is 
raised. 

II. The portion of national income which can be appropriated 
to public purposes, and the possible amount of taxation, is lim- 
ited ; and we are already far advanced to the utmost limit. 

III. The amount of the revenue raised in time of peace, 
ought to be greater than the expense of a peace establishment, 
and the overplus applied to the discharge of debts contracted in 
former wars, or reserved as a resource for the expense of future 
wars. 

IV. In time of war, taxes may be raised to a greater height 
than can be easily borne in peaceful times ; and the amount of 
the additional taxes, together with the surplus of the peace 
establishment, applied for defraying the expense of the war. 

V. The expense of modern wars has been generally so great, 
that the revenue raised within the year is insufficient to defray 
it. Hence the necessity of having recourse to the system of 

1 Inquiry concerning the Rise and Progress of the National Debt of Great 
Britain (1813), The extracts are taken from the second edition (1815). 



8/2 SELECTED READINGS IN PUBLIC FINANCE 

funding, or anticipation. The sum required to complete the 
pubUc expenditure is borrowed on such terms as it can be 
procured for; and taxes are imposed for the payment of the 
interest; or perhaps to a greater extent, with a view to the 
gradual extinction of the principal. 

VI. In every year of war, where this system is adopted, the 
amount of the public debt is increased ; and the total increase 
of debt during a war depends upon its duration, and the annual 
excess of the expenditure above the revenue. 

VII. In every year of peace, the excess of the revenue above 
the expenditure, ought to be applied to the discharge of the 
national debt ; and the amount discharged during any period of 
peace, depends upon the length of its continuance, and the 
amount of the annual surplus. 

VIII. If the periods of war compared with those of peace, 
and the annual excess of the war expenditure, compared with 
the annual savings during the peace establishment, be so related, 
that more debt is contracted in every war than is discharged in 
the succeeding peace, the consequence is a perpetual increase of 
debt ; and the ultimate consequence must be, its amount to a 
magnitude which the nation is unable to bear. 

IX. The only effectual remedies to this danger, are the exten- 
sion of the relative length of the periods of peace ; frugality in 
peace establishment ; lessening the war expenses ; and increase 
of taxes, whether permanent, or levied during the war. 

X. If the three former of these remedies be impracticable, 
the last affords our only resource. By increasing the war taxes, 
the sum required to be raised by loan is lessened. By increas- 
ing the taxes in time of peace, the sum applicable to the dis- 
charge of debt is increased. These measures may be followed 
to such an extent, that the savings in time of peace may be 
brought to an equality with the surplus expenditure in time 
of war, even on the supposition that the periods of their rela- 
tive duration shall be the same for centuries to come that they 
have been for a century past. 

XL When taxation is carried to the extent mentioned above, 
the affairs of the nation will go on, under the pressure of exist- 
ing burthens, but without a continual accumulation of debt, 
which would terminate in bankruptcy. So long as taxation is 



SINKING FUNDS 873 

below that standard, accumulation of debt advances ; and it 
becomes more difficult to raise taxation to the proper height. 
If it should ever be carried beyond that standard, a gradual 
discharge of the existing burthens will be obtained ; and these 
consequences will take place in the exact degree in which 
taxation falls short of, or exceeds the standard of average 
expenditure. 

XII. The excess of revenue above expenditure is the only 
real sinking fund by which the public debt can be discharged. 
The increase of the revenue and the diminution of expense are 
the only means by which this sinking fund can be enlarged, and 
its operations rendered more effectual : And all schemes for 
discharging the national debt, by sinking funds operating by 
compound interest, or in any other manner, unless so far as they 
are founded upon this principle, are illusory. 

The greater part of these propositions are so incontrovertible, 
that it may appear superfluous to adduce any arguments in sup- 
port of them, and the others may be inferred from these by a 
very obvious train of reasoning. Yet measures inconsistent with 
them have not only been advanced by men of acknowledged 
abilities, and expert in calculation, but have been acted on by 
successive administrations, and annually supported in parlia- 
ment, and ostentatiously held forth in every ministerial publica- 
tion. These seem to have gained possession of the pubhc mind, 
and we hear them daily extolled and confided in by persons, in 
other respects, candid and intelHgent. This not only supplies 
an apology for examining the principles minutely, but renders 
such an examination necessary. 

Hamilton's twelfth proposition is supported by the following 
argument : 

The progress and discharge of the debt of a nation are regu- 
lated by the same principles as those of an individual ; and 
experience shows, that measures of public finance are often 
conducted with a degree of imprudence seldom exhibited in the 
management of private affairs. We may, however, extend our 
views to a greater length of time in regard to the former. 

It is true that, upon abstract principles, the smallest sum lent 



874 SELECTED READINGS IN PUBLIC FINANCE 

out for compound interest will, in length of time, increase to an 
indefinite magnitude : But it is obvious that the improvement 
of money in that way would be limited, at a certain amount, by 
the want of demand from borrowers, and the impossibility of 
investing it in productive capital of any kind. It is restricted 
within a much narrower limit by the mutability of human meas- 
ures, and the actual impossibility of adherence to the same sys- 
tem, conducted by successive trustees through many generations. 
It is true that if the system were invariably adhered to, the sum 
would increase at the rate which calculation points out, until it 
was limited by the impossibility of finding borrowers, or employing 
it in any profitable manner. 

The system of accumulating a national treasure has been long 
laid aside, and is not likely to be revived. We may, therefore, 
dispense with any further consideration of nations storing up 
wealth, and bestow our attention on the actual case of nations 
laboring under debt ; sometimes endeavoring to discharge it : 
often obliged to increase it. 

Suppose an individual has contracted a certain extent of 
debt, and afterward attains to circumstances which enable him 
to discharge it» If no oppressive and usurious measures be 
practiced against him by his creditors, and if he pay the interest 
regularly, the sum which he must pay altogether, before he be 
clear of debt, is the amount of money he borrowed, and the 
simple interest of each portion of the same, from the time of its 
being borrowed to the time of its repayment. Suppose he bor- 
rows ;£ 1 0,000, and that for 10 years he pays the interest, but 
no part of the principal. If the rate of interest be 5 per cent, 
he pays during that time ;£500 annually for interest, or ;£"50oo 
altogether; and if, by a sudden acquisition of wealth, he is able 
to discharge the debt at the end of 10 years, he pays exactly 
^15,000 altogether. But suppose, by an amelioration of his 
circumstances, he is enabled to pay ;£iooo annually to his 
creditors, for principal and interest. The first year he pays 
;£"500 for interest and ;£500 toward the discharge of the prin- 
cipal. The remaining debt is X9500, and the interest of this 
being ;£475, if he can pay p^iooo next year, he discharges ^525 
of the principal, leaving a debt of ^8975. The mterest of this 
is ^£448 15^-. and next year, by paying p^iooo, he discharges 



SINKING FUNDS 875 

£SS^ S^- of the principal, and reduces the debt to ^8423 15^. 
If he continue to act in this manner, the whole debt will be 
discharged in about 14J years; and the whole sum which he 
pays, including the ^5000 paid during the first 10 years, is 
;£i9,250 nearly, being the amount of the principal, of 10 years' 
interest on p{^i 0,000, of 11 years' interest on ^9500, of 12 years' 
interest on ;£8975, of 13 years' interest on ^8243 15^". and so 
on ; altogether, the principal, together with the simple interest 
of each portion of the same, from the time that the debt was 
contracted, till the time that portion was repaid. If he can 
only spare £,7^0, and therefore discharge ;!t2 50 of the principal 
the first year, it will require somewhat above 22 years to dis- 
charge the whole ; and if he can only spare ;^6oo and therefore 
discharge J^ioo of the principal the first year, it will require 37 
years. In all these cases, it is the surplus of ;£500, of ;^2 50, 
or of ;£ioo, which the debtor can spare above the interest, that 
enables him to discharge the principal. 

Instead of conducting the business in this manner, he may pay 
only the ^500 of interest to his creditors and lend out the other 
^500 at interest, and lend again ;£50o more at the end of the 
next year, and so on, accumulating the sum lent by compound 
interest, till it amounts to ;^ 10,000, and then discharge his 
whole debt at once. It will require exactly the sarne time of 
14^ years to accomplish this. If he transact the business him- 
self, the second way will be attended with more trouble, but the 
result will be the same. If he employ an agent to transact the 
loans, he will be a loser by following the last-mentioned methods, 
to the extent of the fees paid for agency. 

If the debtor be able to pay no interest during the first 10 
years, the creditors will either insist on accumulating the 
interest with the principal, in the manner of compound interest, 
or the debtor must borrow annually from other hands, to pay 
the interest annually to his original creditors, and must also 
borrow more each succeeding year, to pay the interest of the 
debts thus contracted. In either way, his debt at the end of 
10 years will amount to ^16,289, the interest of which being 
;£"8i4 9^0 an annual payment of ^1000 would discharge only 
;£i85 \\s. of the principal debt the first year, and would require 
about 35 years to discharge the whole, whether he pay the 



876 SELECTED READINGS IN PUBLIC FINANCE 

;£'iooo annually to his creditors to lessen the principal, after 
payment of the interest, or whether he accumulate the overplus 
by compound interest till he be able to pay the whole debt at 
once. 

Substitute millions, or ten millions, for thousands, and the 
above reasoning is equally applicable to the public debt of a 
nation. 

If the debt be ever discharged, which can only be done by a 
surplus revenue, and if the business be transacted as private 
affairs are, where the creditor is entitled to no more than the 
sum lent, together with the interest, the time required for the 
discharge of a public debt will be the same as that for a private 
one, when the proportion of surplus revenue is the same ; and 
this holds whether the surplus is paid annually to the creditors, 
in discharge of part of the debt, so far as it will go, or accumu- 
lated in a sinking fund, in the hands of commissioners appointed 
for that purpose. 

The whole sum paid to the public creditor, before the debt be 
discharged, is equal to the sum advanced by him, together with 
the simple interest of each portion of the same, from the time 
it was advanced to the time it is repaid, providing the interest 
be paid regularly from the time the debt is contracted. But if 
the payment of the interest be suspended for a certain time after 
the debt is contracted, then the whole sum paid is equal to the 
principal debt, together with the compound interest of the same, 
during the period of suspension, and the simple interest of each 
portion of this accumulated sum, from the time it is put in a 
train of payment, till that portion be paid. 

Elsewhere Hamilton criticises Price's views more specifically, 
arguing, in part, as follows : 

It will be proper, before proceeding, to state distinctly the 
points in which all agree, and the 'points at issue. 

It is universally admitted, that every productive additional 
taxation tends to prevent the progress of the national debt, if 
it be in a state of accumulation ; and to accelerate its discharge, 
if it be in a state of redemption. 

That every increase of expenditure, whether arising from 



SINKING FUNDS 877 

necessity or profusion, tends to increase its accumulation, or 
retard its discharge. 

That any sum of money, however small, improved by com- 
pound interest, will amount, in length of time, to an indefinite 
magnitude ; and therefore, 

That any surplus of national revenue above national expendi- 
ture, will be sufficient, if it continue for a long time, and be 
faithfully applied, to discharge any national debt, however 
great. 

The doctrine maintained by Dr. Price is, that the formation 
and inviolable appropriation of a sinking fund, operating by 
compound interest, in war as well as in peace, is a measure of 
the utmost consequence, and that the effects of this system are 
greatly superior to those of any other application of a surplus, 
the expendihire and taxation being equal. ... His work means 
this, or it means nothing : for it was never called in question 
that saving of expenditure, or increase of taxation, have a 
powerful effect on the state of national finance. 

In opposition to Dr. Price's doctrine, it is maintained, that 
the separation of a sinking fund from the general revenue, is 
a measure of no efficacy whatever ; — that the first and second 
methods of applying a surplus above mentioned^ are merely 
different modes of official arrangement, leading to the same 
result; — that in time of war, when the expenditure exceeds 
the revenue, the preservation of the sinking fund, and conse- 
quent increase of loans, is a system from which no advantage 
can arise; — if it could be conducted without expense, it would 
be nugatory; as it is necessarily attended with expense, it is 
pernicious; — that at the conclusion of a war, any surplus reve- 
nue applied for the discharge of debt during the subsequent 
peace, operates by compound interest, during the continuance 
of peace. But the notion of uniting that period to another 
period of peace, or to a still longer period of alternate war and 
peace, in order to obtain the powerful effect of compound 
interest acting for a great length of time, is illusory. 

^ Hamilton here refers to Price's statement that there are three methods of apply- 
ing a sinking fund: (i) interest released by previous payments on principal may be 
applied to further reduction of the debt ; (2) interest thus released may be spent for 
current expenses ; (3) or taxation may be reduced to that extent. — Ed. 



878 SELECTED READINGS IN PUBLIC FINANCE 

We return to the case supposed by Dr. Price, above men- 
tioned,^ and compare the effects of the first and second methods 
of applying the surplus, either in time of peace or war. 

In time of peace, when the second method is followed, 
;£ 1 0,000, being the interest of the debt discharged the first 
year, is applied to the current services of the second year; 
;£20,ooo, the third year ; and these suras are supposed requisite" 
to complete what the service of each year requires ; and as Dr. 
Price observes, they must have been borrowed, if the first 
method had been followed.^ If loans be made for this purpose, 
either taxes must be imposed for the payment of the interest, 
or the sums borrowed accumulate by compound interest. In 
the former case, the nation is subjected to the burthen of taxes 
for payment of the interest of ;£ 10,000 the first year; of 
;£"20,ooo more, or ;2^30,ooo altogether, the second year ; and of 
-£36,550,000 the eighty-sixth year; none of which would have 
been imposed according to the second method. It is this grad- 
ually increasing, and ultimately large additional taxation, that 
occasions the difference of ;£2o8,25o,ooo stated b}^ Dr. Price, 
as the loss arising from the second method. If the same taxes 
be imposed when the second method is followed, their produce 
is not wanted for the services of the year, and must accumulate 
at the end of the period to the above-mentioned sum in favor 
of the public. 

If taxes be not imposed to pay the interest of these loans, 
then to the ;£20,ooo borrowed the second year, there must be 
added a sum sufficient to pay the interest of the loan of the 
former year; and, in like manner, a sum must be borrowed 
each succeeding year, equal to the interest of all the former 
loans, by which means the amount of these loans would ac- 
cumulate by compound interest against the public. 

The disengaged annuities under the second method, may be 
dissipated by profusion, and then there will be a difference 

^ Hamilton had devoted several pages to a presentation of Price's arguments. 
These pages have been omitted here, since Price's argmnents to which Hamilton 
refers may he found in the preceding selection. — Ed. 

2 Price, it will be recalled, had argued that his first method of applying a sinking 
fund would reduce the debt even though " the state had been all along adding every 
year to its debts three millions." See p. 535. — Ed. 



STINKING FUNDS 879 

between the methods equal to what Dr. Price states ; but it is 
the profusion, and not the mode of application, that is the 
cause of that difference. They may be applied to the construc- 
tion of canals, harbors, and other objects of national utility; 
and the benefits accruing from these to the public, may repay 
the expense of their execution, or otherwise ; but the propriety 
of this mode of application of surplus revenue, does not belong 
to our present inquiryo 

In war, let us adopt Dr. Price's supposition of three millions 
being required annually in addition to the sums raised within 
the year, and of continuing the application of ;£200,ooo as a 
sinking fund ; which sum is comprehended in the loan of three 
millions. The debt contracted in three years, is nine millions ; 
and the additional taxes for payment of interest at 5 per 
cent come to ;;^450,ooo. The national debt redeemed by a 
sinking fund of ;£200,ooo, operating by compound interest in 
three years, is ;£'630,5oo, and therefore the additional unre- 
deemed debt is ^8,369,500. 

If no sinking fund be continued during the war, a loan of 
;!^2, 800,000 only will.be required the first year, the interest of 
which is ^140,000, But the taxes imposed that year amount to 
;£ 1 50,000 (for we suppose the extent of taxation in both 
methods equal), therefore there is a surplus of ;£i 0,000 appli- 
cable to the service of the second year. The loan required 
for the second year will therefore be ;£"2,790,ooo; the two 
loans together, ^5,590,000; and the interest upon them, 
^279,500. The additional taxes imposed the two first years 
amount to ;£300,ooo, leaving a surplus of ;^20,500 applicable 
to the service of the third year. The loan required the third, 
is therefore ;£2,779,5oo, and the amount of the three loans 
^8,369,500, exactly the same as the unredeemed debt when a 
sinking fund is continued ; and it is obvious that the same 
equality will hold for any number of years. 

When Dr. Price says that a debt of 258 millions might be 
discharged in eighty-six years, at no greater expense than an 
annual saving of ;£200,ooo, he overlooks the taxes imposed, 
year after year, for the payment of interest; a great part of 
which would not have been needed, if that annual sum had not 
been separated from the public revenue. The reasoning used 



88o SELECTED READINGS IN PUBLIC FINANCE 

above is equally applicable to any other supposition of war 
expenditure, whatever be the annual deficiency, whether uni- 
form or varying, — whether continued for three or thirty, or an 
hundred years, still the taxation and expenditure of each year 
being the same, the finances of the nation will be found in the 
same condition at the end of the period, whether the sinking 
fund be preserved inviolate, or entirely laid aside. 

If no sinking fund be kept up for thirty years, a little alteration 
on the arrangement of public accounts would bring them exactly 
to the same state as if it had been uniformly adhered to ; and 
conversely, the present form of our financial accounts, arising 
from a sinking fund, may be brought by a like alteration of 
arrangement, to the form in which they would have stood, if no 
sinking fund had ever been thought of. It is impossible that a 
mere change of order in the public accounts, capable of being 
reversed at any time, can be attended with advantage to the 
public. 

At the termination of a war, the nation remains charged with 
a certain debt, and it possesses or ought to possess, a certain 
surplus revenue. The efficacy of this surplus to discharge the 
debt depends upon its proportion to the debt, and the length of 
time during which it is applied to that purpose, and upon these 
alone. It operates by compound interest. But the manner in 
which the debt was contracted, or the surplus obtained, have no 
relation to the progress and period of its discharge. It is of no 
avail that a sinking fund had been operating by compound 
interest during a former peace. When war breaks out again, 
the operation of compound interest is at an end. In place of 
continuing to discharge debt, an additional debt is contracted. 
When peace returns, the operation of discharge recommences 
from a new basis, according to the state of finance at the time. 
The public debt is certainly increased — the proportion of sur- 
plus revenue to that debt, and therefore the time requisite for 
its complete discharge, may be greater or less than at the 
former peace ; but the two periods of peace cannot be united to 
obtain a powerful effect from the long continuance of compound 
interest. 

The Doctor's plan for discharging the national debt by bor- 
rowing money at simple interest, in order to improve it at com- 



SINKING FUNDS 88 1 

pound interest, is, we apprehend, completely delusive. He 
admits the absurdity of such a measure in private life, — and 
its absurdity in national finance is exactly the same. The cases 
differ only in extent of sum, and duration of time, which no 
ways alter the general tendency of the measure. Suppose 
a million borrowed for this purpose, and assigned to commis- 
sioners for the redemption of the national debt, in whose hands 
it operates by compound interest. The interest of this loan is 
;£50,ooo, which must either be provided for by some additional 
tax, or saved by some measure of public economy ; or if neither 
of these be adopted, an additional loan must be made next year 
to pay the interest. In the former case, it is the tax or the 
economy, and not the operation described, that benefits the 
revenue ; and they would have produced the same effect by 
affording an additional surplus improved at compound interest, 
without any loan. In the latter case, an additional sum of 
;£50,ooo is borrowed the second year ; and a sum equal to the 
interest of both loans, or ;£"i02,500, the third year ; and thus the 
debt accumulates by compound interest against the public, 
exactly to the same extent that the money vested in the hands 
of the commissioners accumulates in its favor.^ 

96. Sinking-Fund Legislation in the United States. — The 

early sinking-fund acts of 1792 and 1795 were constructed, in 
general, upon the British model. They placed certain revenues 
in the hands of commissioners who were to redeem United 
States stock, and then draw from the treasury the interest on 
the purchased stock and apply it to making further purchases. 
The act of 1802, passed in accordance with recommendations of 
Gallatin, enlarged and simplified the sinking fund, but did not 
disturb the provisions of Hamilton's sinking-fund law of 1795. 

1 A further point is brought out by Hamilton in his criticism of Pitt's sinking-fund 
policy, which was shaped according to the theories of Dr. Price. Hamilton shows 
that the money borrowed in war time in order to keep up payment on the principal 
of the old debt was secured on terms which really imposed a heavier rate of interest 
than the old debt bore. The result was that England lost heavily by borrowing at a 
higher rate in order to redeem a debt that bore a lower rate. He estimated the loss 
occasioned in this manner between 1793 and 1812 at something less than ;^20,ooo,ooo. 
Inquiry, pp. 149-160. — Ed. 



882 SELECTED READINGS IN PUBLIC FINANCE 

In 1817, however, the whole compHcated apparatus of previous 
acts was swept away, and a permanent appropriation of 
^10,000,000 was made for the payment of interest and reduc- 
tion of principal of the debt. Moreover, it was distinctly pro- 
vided that, in case war should occur with any foreign power, the 
United States should be free to discontinue the redemption of 
the principal of all debts not included in the provisions of earlier 
sinking-fund laws. 

The following account of the operation of the sinking-fund 
law of 1862 is presented by Professor E. A. Ross, in his mono- 
graph upon Sinking Funds : ^ 

With the outbreak of the Civil War begins the final period of 
sinking-fund history. In the earlier part of this period we find 
a return to Hamiltonian principles. Secretary Chase in his 
report of July 4, 1861, advocated the immediate establishment 
of a sinking fund for the expungement of the war loans. The 
fruit of his policy was the clause in the act of Feb. 25, 1862. 

This act, after authorizing a serious appeal to credit, under- 
took to establish the debt on a secure basis. The coin paid for 
duties on imports was to be applied, first, to the payment of 
interest on the bonds and notes of the United States. It was 
then to be applied ''to the purchase or payment of one per 
centum of the entire debt ... to be made within each fiscal 
year, which is to be set apart as a sinking fund, and the interest 
of which shall in like manner be applied." . . . The residue 
of customs receipts was to be paid into the treasury. The 
language of this act is plain. The provision was made part of 
a loan act and was to apply to future as well as to existing debt. 
In view of this, the words of a writer in the Bankers' Magazine 
seem warranted. 

It was a formal notice to all persons, who should loan to the government, 
of its future intention, and constitutes a contract as binding as any can be 
made between it and the persons who have loaned to the government since 
that date. 

1 In Publications of the American Economic Association, Vol. VII (1892). 
Reprinted with consent of the author and the Association. 



SINKING FUNDS 883 

Notwithstanding the law of 1862, there was no compliance 
with its sinking-fund provision during the war. At the close 
Secretary McCulloch, who resembled Gallatin as Chase resembled 
Hamilton, ignored the law of 1862 and proposed a sinking 
fund similar to that of 18 17. He estimated that a yearly 
appropriation to the debt of $200,000,000 would discharge 
the whole in about thirty years. The proposal was not accepted, 
and during his administration the treasury applied to the debt 
whatever funds were available, without reference to the sinking 
fund. As the actual reduction was far greater than that 
required by law, nobody complained. - 

The sinking-fund provision of 1 862 seems to have been ^dis- 
covered by Secretary Boutwell. In his first report he announced 
that he had purchased twenty millions of bonds for the sinking 
fund. He had made further purchases, which he held as a 
special fund subject to the action of Congress. He recom- 
mended that such extra purchases be added to the sinking fund 
until it equaled what it would have been, if the law had been 
complied with from the first. 

In the great funding act of July 14, 1870, reorganizing the 
public debt, it was provided that all bonds applied to the sink- 
ing fund be recorded, canceled, and destroyed, and that a sum 
equal to the interest on all bonds belonging to the sinking fund, 
be included in the yearly amortization. Heretofore the heads 
of the treasury had bought bonds, even beyond the requirement 
of the sinking fund. This action was legalized by a clause 
authorizing the secretary to redeem the five-twenties with any 
coin which he might lawfully apply to that purpose. 

In 1873 the great crisis dried up the sources of revenue seri- 
ously and made it impossible to meet all claims upon the 
receipts. It is possible that, if Secretary Boutwell had been in 
office, there would have been a rigid adherence to the strict 
letter of the law of 1862. Under Secretary Bristow the law was 
practically construed to suit the emergency. It was announced 
that for 1874-75 there would be a surplus revenue of nine 
millions to be applied to the sinking fund. As under the law over 
thirty-one millions was required for the fund, there would be a 
deficiency for the year of over twenty-two millions. This was 
making the sinking fund the residuary legatee of the revenues. 



884 SELECTED READINGS IN PUBLIC FINANCE 

In his report for 1875 Secretary Bristow acknowledged that 
the sinking-fund payment was secondary only to the interest 
on the public . debt, and took precedence of all other appropria- 
tions. As some had asserted that the excess payments of 
former years excused the lapse of the sinking-fund payment 
when need arose, the secretary took occasion to declare that the 
statute imposed a duty to be performed annually, and that pur- 
chases must be made within each fiscal year. The secretary 
explained the cessation of bond purchases by the fact that bonds 
could not be bought at par, while he was forbidden by law to 
pay more. This deadlock, however, had been broken by the 
law of March 3, 1875, which authorized the secretary to obtain 
bonds for the sinking fund by calling in and redeeming the five= 
twenties. 

As the deficiency in the revenues continued, the next secre- 
tary, Morrill, thought fit to present a view of the operations of 
the debt in toto. From his calculations he concluded that the 
public creditor had no ground for complaint. 

The terms of the law of Feb. 25, 1862, required that by the operations 
of the sinking-fund account, the public debt should be reduced in the sum of 
$433,848,215.37 between July i, 1862, and the close of the last fiscal year. 
A reduction has been effected during that period of $656,992,226.44, or 
$223,144,011.07 more than was absolutely required. 

It can therefore be said, as a matter of fact, that all of the pledges and 
obligations of the government to make provision for the sinking fund and the 
cancellation of the public debt have been fully met and carried out. 

The sinking fund first rose into prominence during the 
preparations for specie resumption. The act of 1875 permitted 
the sale of bonds, to procure the stock of gold necessary for 
resumption. A compliance with the letter of the statutes would 
lead to the practice of redeeming and borrowing at the same 
time. Sound finance required that, in such a case, the govern- 
ment should cease buying bonds for the sinking fund, and let 
the cash destined for that purpose accumulate in the treasury, 
awaiting the day of resumption. It was accordingly urged, and 
with reason, that the claims of the sinking fund should be 
suspended. 

This was not done, but something similar was done. The 



SINKING FUNDS 885 

debt to which a yearly one per cent payment was pledged 
included notes as well as bonds. It might, therefore, be held 
lawful to redeem greenbacks, or even '' shinplasters," for the 
sinking fund, in place of bonds, and thereby lessen the mass of 
paper to be confronted on Jan. i, 1879. Accordingly under 
the law of April 17, 1876, ^7,000,000 of fractional currency 
were credited to the sinking fund at five per cent^ interest. 
Similarly $8,000,000 of greenbacks were added under a clause 
in the resumption act. 

Since the accession of Senator Sherman to the treasury 
portfolio a construction of the law of 1862 has prevailed which, 
however consonant with common sense and sound finance, is 
irreconcilable with the theory that the sinking fund then 
established is part of the contract with the public creditors. In 
his report for 1879 the secretary said : " These acts (of 1862 and 
1870) are regarded as imposing upon the secretary the duty of 
providing for the sinking fund out of the surplus revenues of the 
government." The new construction was very apparent in a 
Senate debate, in 1 884, over a proposition to reduce the sinking 
fund. Senator Plumb regarded the sinking fund as merely a 
matter of bookkeeping. ... " The sinking fund has simply 
been something represented by certain entries on the books of 
the treasury, but nothing in the vaults of the treasury." 

Senator Sherman stated that, in 1873 and thereafter, the gov- 
ernment did not pay one fourth or one fifth of the sinking fund. 
In 1877 and the following years, surpluses appeared and much 
more was paid than the sinking fund required. The question, 
then, is. Has the United States, which has pledged its faith to 
pay a certain sum annually, a right to apply the excess payment 
of one year to make up the deficiency of another year .? The 
senator regarded it as a compliance with the law when the gov- 
ernment does substantially what it agreed to do. No man 
could question the faith of the United States because it was for 
three or four years unable from its current revenues to pay the 
sinking fund, provided it has, on the whole, more than made 
good its promise. But while the senator regarded the sinking- 
fund payment as justly amenable to the financial demands of 
the country, he deemed it inconsistent with honor and public 
faith to alter or invade the sinking fund by law. Temporary 



886 SELECTED READINGS IN PUBLIC FINANCE 

exigency might suspend amortization without dishonor, but con- 
scious policy never. 

Our conclusion, then, is that the debt has been reduced, but 
not with the steadiness and automatic regularity contemplated 
by the terms of the law of 1862. Though the total reduction 
has exceeded the requirements of the law, yet so sensitive have 
the yearly appropriations been to the condition of the treasury, 
that it is doubtful if they could have conformed more closely to 
the varying financial situation, had there been no law at all. 

What the secretaries have done — and they could do no more 
— was simply to amortize with the annual surplus, be it large or 
small. It is hard to see, therefore, wherein our sinking-fund 
law, thus administered, differs in effect from a law directing 
the secretary to use surplus funds to pay the debt. If Congress 
had ordered the law to be administered so that the sinking-fund 
appropriation should enjoy a priority over other appropriations, 
not permanent, or regular, the law would have meant some- 
thing. In that case a shrinkage in the revenues would have 
meant a deficiency in the funds for public works, and not in the 
funds for the public debt. We should not then be placed in 
the anomalous position of granting to gratuitous appropriations 
like those of the river and harbor bill, the preference at the 
counters of the treasury over a matter of contract like the 
sinking-fund appropriation. 

It seems, then, from our last experience, that, however solemnly 
a sovereign state may confer upon the principal of the public 
debt the first Hen upon the revenues, considerations of practical 
policy will lead that state to relegate the principal of the debt to 
the frontier of public obligation, there to be abandoned, should 
the national income for a time retreat within narrower bounds. 



CHAPTER XXVI 
NATIONAL AND LOCAL DEBTS COMPARED 

97. Differences in the Nature of National and Local Debts. — 

In addition to important legal differences, national and local debts 
differ in respect of the purposes for which they are contracted. 
This is discussed by Professor Henry C. Adams ^ as follows : 

The rule according to which public functions are allotted to 
the various centers of power in the United States is quite simple 
for one who understands the political philosophy of democratic 
governments. The safety of democratic institutions lies in the 
realization of local self-government, and the principle that con- 
trols in matters of organization is that the administration of all 
powers should lie as closely as possible to those interested in 
their exercise. This theory of allotment would grant to the 
federal government all duties touching purely national and 
sovereign questions ; it would press upon the local centers of 
administration such functions as are of peculiar local interest; 
while the states, standing' between the two, would gather up 
into themselves all the remaining powers that the people have 
chosen to place out of their own immediate control. 

From this it seems natural to expect that local financiering 
should differ from that of the federal government chiefly in the 
variety of purposes for which money is borrowed, and a glance 
at the history of local administration shows this expectation to 
have been met. The commonwealths have frequently borrowed 
money for purposes regarded as lying outside the appropriate 
duties of Congress, and, when we come to consider the course 
of municipal financiering since i860, it will be seen that the 
activity of the minor civil divisions has also greatly extended. 

1 Public Debts, 299-306. Reprinted with the consent of the author and the 
publishers, Messrs. D. Appleton and Company. 

887 



888 SELECTED READINGS IN PUBLIC FINANCE 

The first occasion upon which the states employed their 
credit as a source of revenue brings to view the financial opera- 
tions of the Revolutionary War. There was, at this time, much 
confusion, both of thought and of action, and the line of distinc- 
tion between the local duties of the states and the comprehensive 
duties of the central government had not yet been drawn. The 
states had not yet surrendered any part of their sovereignty, and 
in consequence the administration of their treasury departments 
was largely shaped by national ideas. It is for this reason 
that the first period of local indebtedness records nothing of 
interest to the present comparison.^ The states did not again 
come forward as borrowers of money until about 1830. The 
development of the railroad system, which has since revolution- 
ized all industrial methods, had at this time just begun, and it 
was not then believed that private enterprise was adequate to the 
extensive demands of the public for highways of inland commerce. 
The wildest expectations were entertained respecting the efficacy 
of public improvements, and, under the pressure of speculative 
excitement thus engendered, the states were forced to undertake 
business enterprises upon the basis of borrowed money. 

This period of excitement will receive detailed attention in the 
following chapter ;2 for the present is it adequate to notice that 
public banking and public improvements left upon the states a 
burden of debt from which many of them only escaped through 
financial disgrace. The amount of this debt in 1842, as also its 
character and residence, is shown by the figures in the following 
table : 

. 1 It may, however, be well to add the following details. In order to aid in the 
prosecution of the War for Independence, the states contracted various debts, largely, 
although not wholly, in the form of issues of paper money. After the war many of 
the states did little or nothing toward extinguishing such obligations, and were deeply 
in debt when the new government was formed under the Constitution. In 1790, 
when the federal debt was funded, Congress, upon the advice of Hamilton, decided 
to assume the outstanding state debts incurred for the prosecution of the war. The 
funding act authorized the assumption of $21,500,000 of state debts ; but, after a 
through sifting of the indebtedness, only $18,271,000 vs'as finally assumed. From this 
time onward until the period of which Professor Adams is to treat, the states made 
little use of their credit. — Ed. 

2 Besides Professor Adams's chapter, it may be well to refer the student to a 
contemporary account of the financial situation of the states in 1837, ^Y Alexander 
Trotter, entitled. Observations on the Financial Position of the States of the North 
American Union (London, 1839). — Ed. 



NATIONAL AND LOCAL DEBTS COMPARED 



889 



TABLE SHOWING THE AMOUNT OF DEBT RESTING UPON THE 
STATES IN 1842, AND THE PURPOSES FOR WHICH IT WAS 
INCURRED. 



States and Terri- 


Public and Inter- 


Banking 


Miscellaneous 


Total 


tories 


nal Improvements 








Maine 


_ 


_ 


_ 


^1,734,861 


Massachusetts 






^4,105,000 


— 


^1,319,137 


5,424,137 


New York . . 






21,727,267 


— 


70,000 


21,797,267 


Pennsylvania 








31,186,130 


— 


5,149,914 


36,336,044 


Maryland . 








14,098,854 


— 


1,115,907 


15,214,761 


Virginia 








6,193,161 


^458,107 


343,039 


6,994,307 


South Carolin. 


\ 






3,350,000 


137,704 


2,203,530 


5,691,234 


Georgia . . 








1,309,750 


~^ 


— 


1,309,750 


Alabama . 








— 


15,400,000 


— 


15,400,000 


Louisiana . 








1,200,000 


20,200,000 


2,585,000 


23,985,500 


Mississippi . 








— 


7,000,000 


— 


7,000,000 


Arkansas . 








— 


2,676,000 


— 


2,676,000 


Kentucky . 








3,085,000 


— 


— 


3,085,000 


Tennessee . 








1,198,166 


2,000,000 


— 


3,198,166 


Michigan . 








5,420,000 


— 


191,000 


5,611,000 


Ohio . . 








10,924,123 


— 


— 


10,924,123 


Indiana . 








11,751,000 


1,000,000 


— 


12,751,000 


Illinois . « 








10,371,294 


3,034,998 


121,000 


13,527,292 


Missouri . 








20,000 


389,261 


433,000 


842,261 


Territory of Florida 







3,900,000 


100,000 


4,000,000 


District of Columbia 


— 


— 


— • 


1,316,030 



. From the facts which this table displays, it appears that the 
cotton and tobacco-growing states expressed a decided prefer- 
ence for public banking, while the grain and metal-bearing 
states favored the building of canals and railroads. One may 
not, however, on this account, conclude that public sentiment in 
the North respecting banking questions was more highly educated 
than in the South, for the fact is that during this period the 
people of the North were provided with all the paper money they 
could desire. The Southern states did not so strongly feel the 
need of railroads and canals, for the nature of their produce, and 
the character of their industrial society, did not suggest the 
necessity of rapid inland communication. They regarded it as 
much more desirable to furnish the planter with "capital" for 



890 SELECTED READINGS IN PUBLIC FINANCE 

the adoption of better methods in the culture of cotton, and to 
this end they estabUshed banks, or guaranteed the payment of 
notes issued by private associations. Qn the other hand, the 
great majority of the Northern states seem to have been com- 
pletely mastered by the enthusiasm for public improvements. 
New York led the way by building the Erie Canal, and Penn- 
sylvania and Maryland quickly followed, in order to protect 
their local interests. The lake states also, desiring to avail them- 
selves of the benefits arising from direct communication with the 
Atlantic seaboard, and to open all parts of their territory to 
rapid settlement, adopted a similar policy. Other states, as, for 
example, Kentucky and Tennessee, having no need for either 
cotton-banks or canals, but being influenced by the general 
enthusiasm for public improvements, set about building turnpikes 
and toll roads. 

It appears, then, that the debts contracted by the states between 
1830 and 1850 differ somewhat from those considered in the 
former part of this essay. Not only were the bonds issued 
for a different purpose, but it was supposed that they would 
rest for their extinction upon a different fund ; and from this 
it must follow that the rules appropriate to the management 
of the federal treasury do not apply in all strictness to local 
financiering. 

Since 1850, the history of the treasury operations of the states 
presents little of importance to the student of finance. The 
amount of their indebtedness, less sinking-fund accumulations, 
was, in 1880, as follows: 



Eastern states . 
Middle states . 
Southern states 
Western states 
Pacific states 



$35,207,482 

37.575.110 

123,803,235 

37,671,256 

179,178 



Taking into consideration what we know of the relative 
wealth of the sections here represented, it appears that the only 
considerable sum of debt Ues upon the Southern states, nor is 
this so large but that the entire amount might be wiped out 
by a moderate taxing-policy vigorously applied. This debt was 
created for the most part during a period of bad government. 



NATIONAL AND LOCAL DEBTS COMPARED 891 

The general fact with regard to the states seems to be that, 
at the present time, they possess no financial standing. They 
never appear upon the market as borrowers of large amounts 
of capital, for their administrative activity has been so restricted 
as to render this unnecessary. ^ Duties which they once per- 
formed have passed either to the federal government, as in the 
case of banking, or to private corporations, as in the case of 
railroads. The questions of organization and administration 
suggested by this state of affairs are certainly of importance, 
and all that follows bearing upon the history of local indebted- 
ness may be regarded as leading to their solution. 

If now our attention be turned to the cities and minor civil 
divisions, the same necessity for special and detailed study will 
present itself. The purposes for which municipalities have 
employed their public credit are peculiar to the position which 
they hold in the general structure of government, and the rules 
by which their treasuries should be managed are shaped by 
the peculiar duties imposed. The totals of loc^l indebtedness 
for certain significant years are given in the table below. The 
states, which began to assume obHgations in 1830, found them- 
selves most heavily burdened, wealth and population being 
taken into the account, in 1842 ; but at this date the cities were 
comparatively free from debt, while the minor civil divisions 
had not yet made such use of their public credit as to attract 
general attention. For the year 1880, the amounts presented 
in the tables are net indebtedness ; for the previous dates no 
such careful estimate has been made to secure accuracy of state- 
ment. It is further necessary to notice that for the years 1870 
and 1880 the debt of townships and school districts is included 
under the heading of city obligations. 

1 The unfortunate experiences of certain commonwealths between 1830 and 1840 
led to the incorporation into state constitutions of many provisions designed to check 
the further growth of state debts. Some constitutions prohibit the state governments 
from entering upon schemes for internal improvements. Others, and these are the 
most numerous class, prohibit the states from incurring debts beyond certain small 
amounts, which range from ^50,000, the minimum, to $1,000,000, as a maximum. 
Very frequently, also, the constitutions provide that every debt contracted shall be 
accompanied by the levy of a tax sufficient to sink it within a somewhat short period; 
as from five to ten years. See the Reports upon Public Debt, of the Tenth and Eleventh 
Censuses. These constitutional limitations date back to the period following 1840 : 
they are found in the more recent state constitutions also. — Ed. 



892 SELECTED READINGS IN PUBLIC FINANCE 

TABLE SHOWING THE RELATR^E GROWTH OF STATE AND 
MUNICIPAL DEBTS 1 





1842 


1870 


1880 


State debts 

City debts .... . . . 

County debts . . . . . . 


$198,800,000 
27,500,000 


$352,800,000 
328,250,000 
187,500,000 


$234,430,000 
698,270,000 
123,870,000 





The important feature of this table is the change in the bal- 
ance of indebtedness which its figures portray. While the 
states have in large measure retired from the market as bor- 
rowers of money, the municipalities have increased the frequency 
and extent of their demands. It is true that the total per capita 
debt of both together was not as large in 1880 as in 1870, being 
^23 in the earlier period, and ^21 in the latter, but the propor- 
tion of this sujn for which the cities are responsible is greatly 
increased. 

But for what purposes did the municipal corporations incur 
their obligations ? For an answer to this inquiry we are obliged 
to rely upon data furnished by the Census Report of 1880. 
The facts desired are not there given, but it is possible to arrive 
at substantially accurate results by means of a simple calculation 
from the figures furnished. The figures, upon which this calcu- 
lation proceeds, as well as the results derived, are presented in 
the following table : 



1 For 1890, the last year for which data are available at the time of writingj the 
state and local debts were as follows : 

State debts ....... o $228,997,000 

County debts . o ,...,. 145,048,000 

Municipal debts . i. 724,463,000 

School-district debts 36,701,000 

Great differences appear in the per capita state and local indebtedness of differem 
parts of the country. In West Virginia, in 1890, the per capita indebtedness was 
but $3.32 ; in Maryland it was $40.46. In general, the per capita debts were 
smallest in the South and West. Heaviest of all was the per capita debt of the District 
of Columbia, which was not less than $85.86. Nearly half of the states and territories 
had state aiid local debts amounting to more than $20 per capita. — Ed. 



NATIONAL AND LOCAL DEBTS COMPARED 



893 



TABLE SHOWING AMOUNT OF BONDED DEBT IN 1880, FOR STATES, 
CITIES, AND MINOR CIVIL DIVISIONS AND PURPOSES FOR 
WHICH BONDS WERE ISSUED. 



Purpose for which 

" Local Debts were 

Contracted 


State and Lo- 
cal Indebted- 
ness, AS given in 

THE Census of 
1880 


Indebtedness 
of Cities with 
Population of 

7500 AND up- 
ward, as GIVEN 

in Census of 
1880 


Indebtedness 

of States 

as computed 

FROM Balance 

Sheets of 

States 


Indebtedness 
OF Towns a-nd 
Minor Civil Divi- 
sions, COMPUTED 

FROM THE Fore- 
going 


Bridges .... 


^24,853,388 


^20,809,431 


=__ 


^4,043,957 


Cemeteries . . . 


283,816 


272,912 


— 


10,904 


Fire department 


2,514,082 


2,214,924 


— 


299,158 


Public parks . . . 


40,612,536 


40,490,636 


— 


121,900 


Sewerage .... 


21,370,536 


21,335,434 


■ — 


35,102 


Streets ..... 


86,674,860 


81,502,817 


— 


5.172,043 


Waterworks . „ . 


146,423,565 


141,797,828 


— 


4,625,737 


Bounties, militia, \ 
war J 


75,154,400 


28,722,787 


^33,310,738 


13,120,875 


Funding of float- \ 
ing debts J 


153,949,095 


122,864,804 


2,978,048 


28,106,243 


Refunding old debt 


138,743,730 


71,071,140 


57,057,862 


10,614,728 


Public buildings 


48,493.952 


25,516,829 


6,327,780 


16,649,343 


Railroads .... 


185,638,948 


68,309,493 


47,984,090 


69,345,365 


Canals, rivers, wa- 1 
ter power J 


36,224,548 


16,726,064 


8,655,780 


10,842,704 


Schools and 11- \ 
braries / 


26,509,457 


13,889,915 


— 


12,619,542 


Miscellaneous . . 


130,374,758 


26,571,446 


90,000,000 


13,803,312 


Total . . . 


^1,117,821,671 


1682,096,460 


^246,314,298 


^189,410,913 



There are many significant items in the foregoing table. For 
example, the assistance granted to railroads suggests a line 
of study that demands a comprehensive investigation of the 
entire subject of internal improvements in the United States. 
Another point of interest is the excessive use made by munici- 
palities of floating obligations. Cities have no business to create 
floating debts, and yet over $150,000,000 of their obligations are 
traceable to this source. Or, reverting again to the question of 
the balance of indebtedness, the foregoing table shows that the 
employment of credit by the larger cities is greatly in excess of 
its use by the minor civil divisions. There are in the United 



894 SELECTED READINGS IN PUBLIC FINANCE 

States some three hundred first-class cities, containing about 
one fourth of the total population of the country ; but their 
indebtedness is ^682,000,000 as against ^189,000,000 borne by 
the other municipal corporations. These are indeed startling 
figures and, when understood, disclose certain dangerous ten- 
dencies in the development of local administration ; but since 
it is the purpose of the remainder of this treatise to interpret 
the facts thus disclosed, we need not dwell longer upon them at 
the present time. 

98. Differences in the Principles of Financiering Applicable to 
National and to Local Debts. — Professor Adams continues : ^ 

It remains to inquire how far the general principles of national 
financiering may be followed in the administration of local 
affairs. It is quite clear that these principles must be subject 
to some modification, for rules of deficit financiering spring in 
large measure from the conditions under which debts are con- 
tracted, and these conditions are shaped by the purposes for 
which appeal is had to credit From a survey of the items 
mentioned in the foregoing table, it seems that the debts rest- 
ing upon the cities and minor civil divisions are capable of a 
threefold classification. In the first class are included those 
debts incurred for the purpose of rendering a direct though a 
general service to the public. The building of highways ; the 
maintenance of a fire department; the construction of sewers, 
and the like, are examples of such services. The second class 
includes those debts incurred for the purpose of rendering a 
direct service to the public, but of a particular rather than a 
general character. This division comprises such services as the 
supply of water, or gas, or heat, to the citizens of a municipal 
corporation. The purchase of cemetery grounds for resale to 
individuals would also be included in this class. The third kind 
of local indebtedness arises when the governing body employs 
its credit for granting assistance to private corporations, believ- 
ing thereby to serve the public indirectly through the industries 
established. 

All of these classes of debts have certain characteristics in 

1 Public Debts, 306-316. 



NATIONAL AND LOCAL DEBTS COMPARED 895 

common which distinguish them from debts contracted for 
national purposes. One important point of contrast pertains to 
the nature of the demands for which money is borrowed. When 
the federal government appears upon the market, the demand 
for increased revenue is usually sudden and extensive, and of 
such a sort that no safe estimate can be made of the amount 
needed. This is not true in the case of the minor civil divisions. 
Local financiering is entered upon with foresight, and not under 
the stress of any emergency. It follows from this that common 
business maxims may be more closely observed, and general 
political and industrial considerations less strenuously regarded. 
A local council partakes more nearly of the character of the 
governing board of a corporation than is the case with the 
cabinet of the federal government. For similar reasons, also, 
the defense of local debts is different from that of national 
debts. A city or a town cannot possibly urge the plea of 
imperative necessity. It is true that some great disaster, as 
fire or flood, may incline the local authorities to render imme- 
diate assistance to those citizens who are subjects of misfortune. 
But this desire cannot be reflected in the record of indebted- 
ness, since bonds issued for such purposes would be held invalid 
by the courts. The only defense of local borrowing rests upon 
the common-sense principle of payment by installments. A 
reven.ue law that makes sudden and rapid changes in the rates 
of taxation is the occasion of unnecessary inconvenience and 
vexation, and, notwithstanding the rise of extraordinary demands, 
the evils attending such arbitrary changes may be easily avoided 
by a resort to credit. If, for example, a courthouse or a city 
hall is to be erected, it is of common advantage that the people 
who are called upon to foot the bills should be permitted te 
distribute their contributions over several years. 

A further distinction is suggested when it is noticed that the 
national financier is forbidden to calculate upon any income 
that may arise from the manner in which the proceeds of a 
loan may be expended, and that he is in consequence obliged 
to rely upon taxes for the support of the debt.^ But in con- 
trast with this, it frequently occurs that local authorities under- 

1 The query may arise if bonds issued for territorial purchases do not form an 
exception to this statement. Why may not land bonds be provided for out of the 



896 SELECTED READINGS IN PUBLIC FINANCE 

take productive industries and derive a steady income from the 
investment of moneys borrowed. Thus, the proceeds of a loan 
are said to be spent for remunerative purposes when invested 
in such a manner as to render direct personal service to citizens. 
The furnishing of gas, or of water, or of heat, are illustrations 
of such services. In cases of this sort, the burden of debt is 
thrown upon the public industry which its proceeds establish, 
and its support and final payment are assumed to rest with 
those who are benefited by the service in proportion to the 
benefit received. For example, it is the common practice for 
waterworks to be supported by water rates ; and it conforms 
fully to the requirements of finance that these rates should be 
so adjusted as to pay for the plant independently of taxation, 
except so far as the city is itself a consumer. Such a method 
of treasury management, which leads to the assignment of 
specific funds to specific services, is not common in national 
financiering. But in local affairs, the principle thus disclosed 
is one of wide application, and modifies in a marked degree the 
general rules for the administration of local debts. 

Passing, however, from such general distinctions, one may 
easily observe certain technical differences in the administration 
of a local and a national debt, arising from the varying condi- 
tions under which credit is employed. The most important of 
these pertain to the use of sinking funds, tax loans, and floating 



proceeds of the sale of land ? This might be possible under, some circumstances. 
If the land were already under cultivation, or if the government should purchase it 
with a view of going into the business of forestry, it might be desirable to pay the 
debt created out of the proceeds of the property ; but according to the land policy 
adopted in the United States, the financier is forbidden such calculations. Indeed, 
a loan for the purpose of purchasing large tracts of wild, uncultivated land must 
primarily rest upon taxes, because such lands can only be sold as they are gradually 
absorbed by advancing population. The treasury figures show this to have been 
true in the case of the Louisiana Purchase. The total amount of six per cent stock 
which it was found necessary to create for payment to France was |5n,250,o<X) 
(Bayley's National Loans, p. 120). This stock was issued in 1804. Payment upon 
it was begun in 181 2, and, with the exception of about ^8000, the entire debt was 
expunged in 1821. If now a date as late as 1825 be taken, it appears that the total 
gross revenue from sales of lands lying within the French cession was but $2,286,220 
(Johnson's Report on the Relief of the States, p. 324). There seems to have been 
no difference, then, so far as taxes are concerned, between ^his financial operation 
and the borrowing of money for purposes of war. '" ' ' ' .V ' -' "'" 



NATIONAL AND LOCAL DEBTS COMPARED 897 

debts, as well as to those measures which make provision for 
the future conversion of public funds. Those rules peculiar to 
local financiering thus suggested are as follows. The adminis- 
trator of local finances is permitted to found a sinking fund, at 
the time of issuing bonds, a permission, it will be remembered, 
contrary to sound rules of national financiering. The same may 
be said of the employment of tax loans, although the reasons 
against the use of such obligations by a federal financier are 
not so strong as in the case of sinking funds. Temporary debts, 
on the other hand, are regarded as necessary for governments 
imposed with the duty of carrying through a war, or of meeting 
sudden fiscal emergencies ; but in local affairs there is nothing 
which testifies so unmistakably to fiscal incapacity as the exist- 
ence of large floating debts. And, lastly, the thought of an 
ultimate conversion of the funds, which may properly influence 
the drawing of a federal contract, can modify but slightly the 
form of municipal bonds. 

All these rules spring from the fact that the purposes for 
which local governments may properly contract debts do not 
demand obligations running for a long series of years. It is of 
even greater importance for the municipal than for the national 
administrators to remember that public credit is simply a means 
for anticipating clear revenue. The principles of perpetual 
indebtedness may properly give direction to a federal policy, be- 
cause the extent of extraordinary federal demands is frequently 
uncertain, and the time of their occurrence is altogether beyond 
the control of the government ; but in local concerns, the occa- 
sion for the resort to public credit is wholly a matter of choice, 
and reliance may be had upon calculations of expenditure and 
upon estimates of income. It is this fact that modifies the gen- 
eral rules of finance when credit is employed by the officials of 
minor civil divisions. Let us consider this more closely. 

The attachment of a sinking fund, for example, to a loan bill, 
when the proceeds of the loan are to be expended for war pur- 
poses, is useless, to say the least, because the extent of the 
demand cannot, from the nature of the case, be known. Such 
a procedure involves the absurdity of borrowing money with 
which to pay an old debt, while yet under the necessity of em- 
ploying credit to meet new expenditure. But in local affairs, 



898 SELECTED READINGS IN PUBLIC FINANCE 

early provision for the payment of a debt is evidence of sound 
business principles. All the facts bearing upon the question 
are known to the authorities when they determine to borrow 
money, and there is consequently no reason why they should not 
make adequate provision for expunging a debt at the time it is 
created. This may be the more readily recognized if we call to 
mind the three conflicting interests which may be harmonized 
by the employment of local credit. 

The first of these is the engineering interest, which demands 
that public works once begun should be carried on as rapidly 
as possible to their completion, and this can only be done by 
assured control over a large sum of money. The second is the 
financial interest, which regards it as essential that tax rates 
should not be subject to sudden fluctuations. The third is what 
may be called the general social interest, which stands opposed 
to the perpetuation of local debts. So far as the first two of 
these interests are concerned, the attachment of a sinking-fund 
clause to a debt contract is of no particular importance; but 
since quick and certain payment is demanded by considerations 
of general welfare, and since neither the engineer nor the tax 
assessor can object to an early provision for payment, such pro- 
vision must be accepted as an essential requirement for the 
management of a local debt. The same line of argument might 
be used with regard to tax loans, a form of credit that cannot 
be employed in any marked degree when the extent of extraor- 
dinary demands may not be estimated with safety. Indeed, 
there is no difference in principle between a tax loan and a loan 
with a sinking-fund attachment. 

There is also an additional reason why a law authorizing the 
issue of local bonds should contain a provision for the establish- 
ment of a sinking fund. It will be remembered that cities and 
minor civil divisions are inferior and dependent governments, 
and that their officers are subject to the jurisdiction of the courts 
to the extent that laws which exist must be executed. If now 
a sinking fund be created by the law that creates the debt, a 
public creditor has an assured and an easy method of securing 
payment upon valid obligations. It does not follow that the 
creditor would always enforce his rights should the sinking-fund 
payments be passed, but the fact that it lies within his power to 



NATIONAL AND LOCAL DEBTS COMPARED 899 

do so gives an additional value to the obligations, and conse- 
quently an additional advantage to the municipality in the place- 
ment of its bonds. This consideration does not apply to the 
federal government, nor at the present time to the state gov- 
ernments, because they are both sovereign for debt purposes, and 
the only security which it is possible for their bonds to offer is 
the good will of their legislative bodies. 

The general evils attending an excessive use of floating obli- 
gations have been already pointed out, and it is only necessary 
to add, in this connection, that the alternatives which some- 
times demand their employment by the national financier can 
never arise for local administrators. The only defense of a 
floating debt is the fact that an administration is surprised with 
sudden demands which cannot await the sale of ordinary obliga- 
tions ; but such a surprise cannot present itself to the local 
financier, who himself determines the occasion and extent of 
fiscal demands. As has been frequently remarked, local finan- 
ciers have nothing to do with emergencies. Still, one cannot 
conclude from this that city and county warrants, certificates 
of indebtedness, and such temporary paper, should never be 
employed. Such instruments of credit may or may not consti- 
tute a floating debt, according as they are or are not assigned 
to some assured revenue. If a definite amount of clear income 
be appropriated to their payment, common warrants are prop- 
erly classed as tax loans and not as floating debts, and their 
convenience in treasury administration commends their use. 
That which is here condemned is that looseness, so frequently 
to be observed in the management of city accounts, which leads 
to the settlement of claims by the issue of warrants and certifi- 
cates. The funding of such paper must come sooner or later, 
and the city that thus postpones the liquidation of its accounts 
is sure to become embarrassed. 

It follows, likewise, from the reasons already given, that the 
policy of local indebtedness need not be shaped with a view to 
ultimate conversion. Conversion of a public debt means such 
a modification of the contract as to secure, before its final pay- 
ment, more favorable terms than those originally entered into. 
In the case of national financiering this is of great importance, 
because the conditions under which money is borrowed are com- 



goo SELECTED READINGS IN PUBLIC FINANCE 

monly such that the government is obliged to accede to severe 
terms. A state of war, for example, is unfortunate for the 
borrowing of money, and without any change whatever in the 
industrial relations, the return of peace will give a government 
control over capital at cheaper rates than it was obliged to pay 
during the continuance of hostilities. But this cannot apply to 
local financiering, for a local government is at liberty to select 
the most opportune times for the sale of its bonds, and con- 
sequently it need never suffer the expense of high rates of inter- 
est to overcome the risk of investment. So far as the rate of 
interest is dependent 'upon risk, a municipal council may censure 
itself if that rate be not as low when a debt is created as after 
several years shall have elapsed. 

Again, in the administration of national affairs, it may be 
necessary to contract a debt of such magnitude that it cannot 
be expunged before the natural development of commercial 
relations shall have reduced the rate for which money may be 
secured ; and from this it follows that the thought of ultimate 
conversion should be always kept prominently in view. But 
this reasoning cannot apply to local borrowing, for local debts 
should never cover periods so extended that industrial changes 
can materially modify the value of money while specific obli- 
gations continue to run. The purposes for which municipalities 
borrow do not require that their obligations should long remain 
in the hands of creditors. It may be that those conditions 
justifying an appeal to credit will constantly recur in the course 
of local administration, so that the local government will not be 
freed from debt for a long series of years ; but it will be a debt 
constantly in course of expungement, and in this manner what- 
ever advantage arises from a gradual fall in the rate of interest 
can be secured to municipalities. In local financiering, new 
borrowing secures money for new purposes, while existing taxes 
expunge old debts ; in national financiering, conversion implies 
the employment of fresh credit in order to pay off existing debt 
for the purpose of obtaining better terms — but in either case 
the governing bodies reap an advantage from constantly falling 
interest. 

The accuracy of what has been said may, perhaps, be more 
clearly discerned in the reflected Hght of another distinction. 



NATIONAL AND LOCAL DEBTS COMPARED 901 

Those considerations that determine the time at which the pay- 
ment of debts should begin, as also the rate at which it 
should proceed, are quite different for national and local finan- 
ciering. The point at which the two policies diverge is, that in 
the one case money is borrowed for general and in the other 
for particular purposes. When a debt is contracted for a gen- 
eral purpose, as is the case in time of war, it is conceived to 
rest upon the combined industries of the country, and ques- 
tions pertaining to payment are determined by the state of 
trade. This subject has been already discussed in a foregoing 
chapter. Most local debts, on the other hand, are contracted 
for some definite purpose, and their proceeds are employed 
in such a manner as to establish in the community some par- 
ticular form of public service ; it is natural, therefore, that the 
expungement of a local debt should conform to the manner in 
which its funds were invested. As an illustration, suppose 
capital to be borrowed for the purpose of paving streets or 
providing sewerage, the service thus rendered is common to 
all members of the community, but of such a nature that the 
debt must rest upon taxes. But what is of yet more impor- 
tance, the local council cannot proceed as though the city 
would never be called upon to repeat its expenditure, for pave- 
ments and sewerage are subject to wear,, and must sooner or 
later be replaced by new systems. From this it must appear 
that the payment of a local debt is not to be determined by 
the general industrial conditions of the country, but that sound 
policy demands the expungement of existing obligations before 
the public authorities find it necessary to borrow fresh capital 
for new improvements. It seems, then, that the rapidity with 
which such payments should be made depends upon the prob- 
able life of the pavement or the sewerage, and this is a ques- 
tion that must be determined by the city engineer. 

Similar reasoning applies, only in a more marked degree, 
if the proceeds of a debt are employed to estabHsh remunera- 
tive public works, for in such a case the income from the 
public industry established is supposed to support the debt. 
With regard to gasworks and waterworks, for example, gen- 
eral business rules may be appropriately applied for the re- 
imbursement of capital sunk. Such debts should be paid as 



902 SELECTED READINGS IN PUBLIC FINANCE 

rapidly as the interests of consumers will bear, so that the 
property may become an unincumbered property to the com- 
munity. There are other conditions, however, in which these 
rules of payment may be somewhat modified. In the case of 
purchasing real estate for public parks,' or of lending assis- 
tance to railroads or other private enterprises, the policy that 
should direct a local treasury is more nearly akin to that 
followed by the national financier. The reason is that these 
measures are conceived to be exceptional rather than constantly 
recurring. The real estate of a park, which at first may cost 
a large sum of money, is an investment the value of which is 
not depreciated by time and use ; the benefits supposed to arise 
from large commercial facilities are also of a permanent nature. 
It follows that the payment of such debts may properly extend 
over a longer period, and for two reasons. The fact that the 
investment is permanent obviates the necessity of clearing ac- 
counts before a similar expenditure of fresh money is required. 
But of more importance is the demand that the rate of taxation 
shall not be changed with unnecessary rapidity. If, for exam- 
ple, it were undertaken to pay for a park purchased in four or 
five years, there would be an unnecessary burden entailed upon 
the community, first, by the rapid rise in tax rates, and second, 
by the rapid fall in tax rates after the payment had been ac- 
complished. It is true that this is not of so much importance 
in local taxation, where impositions are for the most part direct, 
as in, the case of federal taxes, where reliance is had upon in- 
direct contributions ; but it yet applies, and from it one may 
conclude that a two or three per cent sinking fund provides for 
the extinction of such debts with sufficient rapidity. 



I 



CHAPTER XXVII 

FINANCIAL LEGISLATION IN THE UNITED STATES 

99. Problems of Budgetary Reform. — Concerning proposed re- 
forms of methods of budgetary legislation in the United States, 
Professor Henry C. Adams has written:^ 

The paper here presented, which deals with technical questions 
that arise in framing budgetary laws and budgetary procedure, is 
written from the point of view of American conditions. This is 
done primarily because the problem of budgetary reform, as it 
presents itself to governments of the American type, is a peculiar 
and, in some of its phases, a local problem. It would be an error 
to answer technical questions of financial procedure in the United 
States as they are answered in England, in France, or in Ger- 
many. For another reason, also, are American conditions of 
peculiar significance in the discussion of budgetary reform. Dur- 
ing the past ten years the federal, the state, and the municipal 
governments in the United States have shown great interest in 
the betterment of financial machinery, and the discussions that 
have taken place, the programs that have been proposed, and the 
laws that have been enacted supply new and pertinent material 
for the study of budgetary problems. Just at present more can be 
learned from the analysis of American than of foreign conditions. 

General Defects of American Financial Practice 

The chief evils in American practice may be traced to a dif- 
fusion of responsibility for money bills. The several steps to be 
followed in financial procedure are not clearly defined, nor can 
there anywhere be found a definite expression of the authority 
which the various officials are at liberty to exercise in dealing 

1 Reprinted with the consent of the author and publisher from the Journal of 
Political Economy, October, 1919. Published by The University of Chicago Press. 
The article is to be incorporated in the revised edition of the author's Science of 
Finance, published by Henry Holt and Company. 

903 



904 SELECTED READINGS IN PUBLIC FINANCE 

with budgetary matters. "Congress habitually disclaims re- 
sponsibility for the methods it employs. Responsibility is shifted 
from the House to the Senate, or from Congress to the Executive, 
or even to the mass of the people."^ The states and municipal- 
ities are, in this matter, no more fortunate than the federal 
government. Every student of financial procedure in these grades 
of government must conclude, as did the commission appointed 
by the Commonwealth of Massachusetts, to compile information 
for the use of the Constitutional Convention, that, "in most of 
the states . . . the function of making up the budget has been 
assumed by appropriation committees with the result that our 
government has on the whole been run without careful financial 
planning. The adoption of a budget system would greatly im- 
prove the conditions in this country by substituting business-like 
financial methods for the present unscientific, haphazard prac- 
tices which are followed by both the Legislature and the appro- 
priation committees." 

This diffusion of responsibility for financial methods may be 
traced to the eighteenth-century doctrine of Montesquieu relative 
to the separation of governmental powers. Definite expression 
of this doctrine is found in the constitutions of six of the states 
that were parties to the framing of the federal Constitution, and 
although no specific mention of that doctrine is to be found in 
the federal instrument, its influence in the organization of the new 
government is everywhere apparent. This fact is of prime impor- 
tance at the present time in the study of budgetary reform inas- 
much as it sets limits to pertinent suggestions for overcoming the 
evils incident to American practice. Budgetary reform must 
render effective the principle of responsibility under the condi- 
tions imposed by the American type of constitutional government. 

The diffusion of responsibility for finance bills, which "seems to 
have reached its limit in the practice of the American Congress, 
shows itself in three ways : 

In the first place, the House and Senate are so organized as 
to distribute authority for the appropriation of public moneys 
between twenty-nine independent committees, of which fourteen 
are committees of the House and fifteen committees of the Senate. 
Ten of these House committees and eight Senate committees re- 
port out all the bills carrying appropriations, while the other 
1 Ford, The Cost of Our National Government. 



FINANCIAL LEGISLATION 905 

eleven, four in the House and seven in the Senate, report out 
measures for pensions, public buildings, and other things carry- 
ing demands on the Treasury, which are met by bills from one 
of the other committees.^ 

In the second place, demands for appropriations may be pre- 
sented from five sources. These are:^ 

The regular annual estimates transmitted by the Secretary of 
the Treasury, at the beginning of each session of Congress ; 

Supplementary estimates also transmitted by the Secretary of 
the Treasury; 

Judgments of the Court of Claims ; 

Reports of engineers of the War Department ; 

Authorization of expenditures by enactments made during 
the session. 

Judgments allowed by the Court of Claims call for neither exec- 
utive nor legislative discussion and for that reason need not be 
included in either the annual or the supplementary Book of Esti- 
mates. But expenditures that follow the adoption of the reports 
of departmental experts or the passage of concurrent resolutions 
bear a different character. They should not receive legislative 
sanction without regard to the opinions of the Executive or to 
public policies approved at elections. 

Congressional disorganization, when deahng with money mat- 
ters, shows itself also in the unlimited right of amendment of 
regularly reported bills by individual members. As a result of 
the free exercise of this right, not only is legislative enactment 
removed yet another step from executive influence, but committee 
responsibility, as distinct from executive responsibility, is thereby 
greatly impaired. 

Types of Budgets 

There are four general types of budgetary adjustments, and 
the first of the technical questions of reform in financial procedure 
is to determine which of these types meets most perfectly the 
peculiar requirements of the government under consideration. 
These types may be described as (i) The Executive Budget which 
rests on Sovereign Authority ; (2) The Executive Budget which 
rests on Conferred Authority ; (3) The Legislative Budget ; and 

1 Adapted from Collins, The National Budget System and American Finance. 

2 Ford, The Cost of Our National Government. 



go6 SELECTED READINGS IN PUBLIC FINANCE 

(4) The Joint Executive and Legislative Budget. Although cur- 
rent discussion makes use of these terms, the distinction between 
them does not seem to be entirely clear, and for that reason a 
word of explanation will be submitted respecting each. 

I. Tke Executive Budget which rests on Sovereign Authority 

By this phrase is to be understood a financial adjustment in 
which the executive branch of the government exercises a domi- 
nating influence over financial programs. The phrase "dominat- 
ing influence" is used rather than "constitutional control" for 
the reason that there are many cases in which the reading of the 
Constitution seems to give the popular branch of the Legislature 
adequate control over finance bills when, in fact, the exercise of 
that control is so confined by the structure of the state, by estab- 
lished usage, or by other clauses in the Constitution, that the 
influence of the popular branch of the government on current 
policies through appropriations amounts to little or nothing. It 
is in this sense that the budget of the German Empire, as organ- 
ized under the Constitution of 1870, was an executive budget. 

The state of Maryland provides another illustration of an exec- 
utive budget, or rather of an attempt to form an executive 
budget. In November, 1916, an amendment to the constitution 
was approved, which strengthened the hands of the Governor in 
dealing with financial legislation, if indeed it did not make him 
the dominant political factor in the state. This is a most signifi- 
cant revolution in public sentiment, inasmuch as the constitu- 
tion of Maryland, adopted in 1776, contains the formal declaration 
that "the legislative, executive, and judicial powers of govern- 
ment ought to be forever separate and distinct from each other." 

The new amendment provides that the Governor shall be 
responsible for all proposals for expenditures that can have any 
bearing on questions of public policy,^ and that he shall transmit 
his budget to the presiding officers of each house, together with a 
"budget bill" which contains a detailed program of appropria- 
tions fully classified and itemized according to standard rules. 
Before final action is taken by the Legislature, the Governor may, 
wnth the consent of that body, submit amendments to correct 

1 The estimates for the judicial and legislative departments, and for public 
schools, although included in his budget, cannot be revised by the Governor. 



FINANCIAL LEGISLATION 907 

oversights or to meet emergencies, but all such amendments are 
made a part of the original bill. The control of the Legislature 
over the executive program is limited to reducing or striking out 
items contained in the bill as received. 

The formal domination of the Governor over financial matters,, 
and through appropriations over general policies, seems to be 
fully established. In one respect only does the Legislature retain 
the right of financial initiative. That body is given the power to 
enact supplementary appropriation bills for purposes not included 
in the Governor's budget, provided the projects are supported 
by a majority vote of all members elected to each house. 

Each such appropriation, however, must be embodied in a separate bill 
limited to a single object and purpose, and provision must be made in the 
bill itself for a levy of a tax sufficient in amount to defray the expenses 
thereof. Moreover, neither house of the Legislature may consider any 
supplementary appropriation until the general budgetary bill has been 
acted upon. Unlike the general appropriation act, all supplementary 
measures must be submitted to the Governor for his approval or veto.^ 

There can be no question of the purpose of the Maryland 
Amendment of 1916. Its aim is to impose on the Governor sole 
responsibility for ordinary financial legislation, to make it impos- 
sible for the Legislature to change radically the Governor's pro- 
grams for such legislation, but at the same time to permit new 
constructive legislation to be enacted on the initiative of the 
Legislature with the approval of the Governor. How the plan 
will work time alone can tell. Were the Governor a member of 
the legislative body and the government a committee responsible 
to the Legislature, the plan would be logical and doubtless work- 
able; as things are, the citizens of Maryland must be prepared 
for frequent interruptions of public business because of political 
deadlocks. 

2. The Executive Budget which rests upon Conferred Authofity 

The English budget is an illustration of a budget of this type, 
and it is the only type possible under the English Constitution, 
which provides for party government through a committee re- 

1 State Budget Systems in the United States, a Report of a Commission to Com- 
pile Information, submitted to the Constitutional Convention of Massachusetts, 
p. 10. 



9oS SELECTED READINGS IN PUBLIC FINANCE 

sponsible to the House of Commons, This committee — the 
Prime Minister and cabinet members — is the government and as 
such controls all policies and programs so long as it retains the 
confidence of Parliament. As soon as it fails to command a 
majority in the Tlouse of Commons it ceases to be the accredited 
government, and another government is raised to carry on the 
King's business. The steps in budgetary procedure in England 
are Avell known. The cabinet makes the estimates, and the Chan- 
cellor of the Exchequer, who is the Second Lord of the Treasury, 
transmits these estimates to Parliament. These estimates are 
framed as a bill by the government; and the House limits its 
authority to approval or disapproval of the proposals of the 
cabinet. Members of the House deny themselves the right of 
amendment, with the single exception that they may reduce or 
strike out items. 

The English budget, like the imperial German budget, is an 
executive budget. Both originate with the administration and 
in both cases the administration controls finance bills while before 
the legislative bodies. The political character, however, of the 
two systems is essentially different. The one was the expression 
of sovereign authority and stood for autocratic domination ; the 
other is the expression of delegated authority and stands for the 
domination of the popular will. The English system cannot be 
understood until it is recognized that the object of the House of 
Commons in curtailing its own initiative on finance bills is to 
make effective its domination over general policies. We may 
admire this English system. It seems to fit perfectly the class 
organization of English society during the past two centuries. 
Nor is it for us to discuss in this connection Avhether the English 
plan of government by parties will continue to stand in the pres- 
ence of a real democratization of the Kingdom. Our lesson 
is learned when it is observed that the personal and official 
connection between the executive and the legislative departments 
of the government is the key to the success of English financial 
procedure. The transfer of this English system to a country in 
which the executive is constitutionally responsible to the voters 
and not to the Legislature is impossible. The budgetary problem 
in countries that have adopted the essential principles of the 
Constitution of the LTnited States is quite different from that 
which submits itself either to Germany or to England. 



FINANCIAL LEGISLATION 909 

3. The Legislative Budget 

Under this phrase is induded any type of financial adjustment 
that gives the legislative department of government domination 
over financial programs, or through financial programs over 
general governmental policies. Two illustrations may be sub- 
mitted, the one drawn from the financial practice of our federal 
government, and the other suggested by the New York Budget 
Law of 1916. 

The leading facts respecting the financial procedure of the 
United States are commonly known. During the revolutionary 
period, and during the seven years covered by the Confederation, 
there was, strictly speaking, no executive department of govern- 
ment. Congress itself was a committee appointed by the states 
to secure co-operative action on the part of the states. It was 
clothed with no abiding authority, although, because of the press- 
ing nature of the problems with which it was called upon to deal, 
it did assume to exercise certain administrative as well as 
legislative functions. The collapse of this experiment, when it 
came, was formal and final. In 1789 this pseudo-government 
gave place to a real government, and the financial difficulties 
experienced during the period of the Confederation were, per- 
haps, the strongest argument in support of the change. 

Under the new government the popular branch of the Legisla- 
ture was" given the exclusive right to "originate" money bills, 
and this fact, taken in connection with the instinctive jealousy of 
executive authority, produced in the United States a budget of 
the legislative type. The interpretation placed on the preroga- 
tives of the executive also contributed to the same result. The 
President has no official authority to give shape to finance meas- 
ures. "The regular statement and account of the receipts and 
expenditures of public money" for which the Constitution pro- 
vides is a duty imposed on Congress and not on the executive. 
The Secretary of the Treasury, although a cabinet member, has 
never been regarded as a finance minister responsible for the 
framing of finance bills. As an administrative servant of Con- 
gress, his hands have from time to time been somewhat strength- 
ened, but this has always been at the expense of bureau chiefs 
and heads of departments, and not at the expense of what Con- 
gress has assumed to be its constitutional prerogatives. Such 



9IO SELECTED READINGS IN PUBLIC FINANCE 

changes as have taken place seem to encourage rather than to 
discourage executive disintegration in budgetary matters, and 
executive officials, knowing that they have no constitutional 
basis for constructive action, have quite generally acquiesced in 
the legislative assumption that the executive department has no 
responsibility for the framing or the meaning of finance bills. 
If to this be added the fact that members of the House and Senate 
exercise practically an unlimited right of initiative and amend- 
ment during the passage of money bills, while the veto of the 
President is limited to the approval or disapproval of appropria- 
tion bills en bloc, the essential weakness of the executive in mat- 
ters of financial procedure becomes evident. It is therefore easy 
to imderstand why the legislative type of budgetary procedure 
has established itself as a feature of federal organization. 

The New York Budget Law of 1916 is another illustration of a 
legislative budget. No change in the character of customary 
financial procedure was attempted, but it undertook to strengthen 
and render more effective the "legislative process dealing with 
appropriations." 

This law represents three features that are of interest. In 
the first place, a conference between the finance committees of 
the Senate and the Assembly takes place before these bodies 
meet in legislative session, an adjustment which is a marked 
improvement over the common practice of meeting only to com- 
promise the differences between Senate and Assembly bills. In 
the second place, a joint bill is submitted to both houses at the 
same time and the Senate and Assembly members of the joint 
committee appear on the floors of their respective houses to ex- 
plain and define the bills submitted. In the third place, the right 
of amendment by members is considerably curtailed. The law 
provides that "while the bill is before the Committee of the 
Whole of the Senate, or on the order of second reading in the 
Assembly, it may be amended either by inserting additional items 
or by increasing, reducing or eliminating items, but on third 
reading no amendments are in order except to reduce or eliminate 
an item without unanimous consent. The purpose of these pro- 
visions is to give the appropriation measures ample consideration 
and publicity and to prevent the practice of 'tacking' on meas- 
ures to the general appropriation bill."^ The New York Law of 
1 State Budget Systems in the United States, p. 24. 



FINANCIAL LEGISLATION 91 1 

1916 is of interest because it is a formal attempt to make a 
budget of the legislative type a successful governmental instru- 
ment. From these two illustrations one may learn the character 
and discern the political implications of a legislative budget. 

4. The Joint Budget 

The character of this type of budgetary procedure is suggested 
by the phrase used to describe it. It means the control of a 
nation's finance by the joint co-operative action of the executive 
and legislative departments of the government, such action being 
so organized as to make efficient use of the peculiar official re- 
sponsibilities of each department. It is the type of budget that 
commended itself to President Taft when in his budget message 
of 1912 he urged on Congress the necessity of federal budgetary 
reform. At the close of this message he expressed himself as 
follows : 

The purpose of the report which is submitted is to suggest a method 
whereby the President, as the constitutional head of the administration, 
may lay before the Congress, and the Congress may consider and act on, 
a definite business and financial program ; to have the expenditures, 
appropriations, and estimates so classified and summarized that their 
broad significance may be readily understood ; to provide each Member 
of Congress, as well as each citizen who is interested, with such data 
pertaining to each subject of interest that it may be considered in relation 
to each question of poHcy which should be gone into before an appro- 
priation for expenditures is made ; to have these general summaries 
supported by such detail information as is necessary to consider the 
economy and efficiency with which business has been transacted ; in short, 
to suggest a plan whereby the President and the Congress may co-operate 
— the one in laying before the Congress and the country a clearly ex- 
pressed administrative program to be acted on ; the other in laying before 
the President a definite enactment to be acted on by him. 

Budgetary Reform in the United States 

Budgetary reform did not become a political issue until the 
first decade of the twentieth century, when considerable attention 
was given to this subject by both the federal government and 
state governments. For convenience of treatment, these will be 
separately considered. 



912 SELECTED READINGS .IN PUBLIC FINANCE 

Federal Budgetary Reform 

From the organization of the Treasury Department, including 
in that phrase those adjustments traceable to the influence of 
Albert Gallatin, down to 1909, when President Taft took up 
the task of formulating an administrative budget, the only 
congressional enactments which permanently affected financial 
procedure were the Acts of 1870 and 1874, according to which un- 
expended balances of general appropriations were to be covered 
back into the Treasury. Large sums had been accumulated by 
certain departments and bureaus as unused portions of past ap- 
propriations. In one case this unexpended balance was the 
accumulation of a quarter of a century and amounted to thirty 
millions of dollars. It is, of course, futile to expect Congress to 
control administrative policies by means of current appropria- 
tions as long as a department, a bureau, or a service has at its 
disposal revenues from past appropriations with which to expand 
old or establish new undertakings. A consolidated fund is an 
essential feature of any sound financial organization, and the 
effect of the Laws of 1870 and 1874 was to establish the integrity 
of such a fund. 

To President Taft belongs the credit of having forced the 
problem of federal budgetary reform on the attention of the 
public. In 1910 an appropriation was made "to enable the Presi- 
dent . . .to inquire more effectively into the methods of trans- 
acting public business . . . with a view to inaugurating new or 
changing old methods ... so as to attain greater economy and 
efficiency therein." In 191 1 a Commission on Economy and 
Efficiency was created which, after fifteen months' investigation, 
submitted a report on "The Need for a National Budget," This 
report was made the subject of a special message and was trans- 
mitted to Congress on July 27, 1912. The message itself is well 
worth the reading as expressing the embarrassments experienced 
by the executive in the exercise of his prerogative as the only 
official elected by the vote of all the people. Regarded as a 
program for constructive legislation, it is a statesmanlike docu- 
ment. It points out the evils of loose financial practice; it recog- 
nizes the restrictions under which both the executive and the 
Legislature are called upon to act; and it refrains from futile 
worship of political leadership in a country in which political 



FINANCIAL LEGISLATION 913 

leadership finds no constitutional warrant. As already pointed 
out, it proposes a plan for co-operation between the executive and 
Congress. It advocates a joint budget as the type which meets 
most perfectly the American situation. 

It must be conceded that the effort of President Taft to develop 
a sound budgetary practice has, up to the present time, produced 
but meager results. So far as this may be traced to what is called 
the jealousy of the Legislature of the executive, it cannot be 
regarded as a permanent obstruction to co-operative effort. The 
political situation under which the problem of budgetary reform 
now comes up is pecuHar. The popular branch of the Legislature 
has maintained its so-called constitutional prerogative as against 
the executive, but in so doing the control over general policies 
has been transferred to the Senate. It was never intended by the 
founders of this government that the Senate should exert a domi- 
nating influence in public affairs, but such is the condition into 
which the jealousy entertained by the House of the influence of 
the executive has permitted the political organization of the fed- 
eral government to drift. The situation is full of danger, a 
danger not to be overcome (indeed, the incongruity of the situa- 
tion is emphasized) by the amendment to the Constitution which 
permits senators to be elected by popular vote. The only hope 
for the recovery by the House of its lost influence in the admin- 
istration of public affairs is for it to accept the offer of the ex- 
ecutive to co-operate in the formulation of a joint budget and to 
agree on the rules which the House and the executive will follow 
in the preparation of finance bills. In this situation is found 
the chief hope for federal budgetary reform. The argument for 
such reform will not be weakened when it is recognized that the 
restoration to the House of Representatives of its constitutional 
influence as the popular branch of the government is seen to be 
a by-product of such reform. 

State Budgetary Reform 

In 1910, when President Taft sent his special message to Con- 
gress on the need of a national budget, no state in the Union had 
provided either by statute or constitutional amendment for for- 
mal budgetary procedure. At the present writing twenty-six 
states have made such provision and others are taking steps in 



914 SELECTED READINGS IN PUBLIC FINANCE 

this direction. Twenty-three of these states are listed in the 
summary that follows. The laws or constitutional provisions by 
which the states named have authorized budgetary rules are 
noted, as well as the kind of a budget which each state has 
adopted, so far as this may be indicated by the location of 
responsibility for initial estimates. 



SUMMARY OF BUDGET PROVISIONS i 



State 


Method of Establishment 


Responsibility for Initiation 
OF Budget 


Connecticut . 


Public Acts of 191 5, Ch. 302 


State Board of Finance 


Illinois . . . 


Laws of 19 1 7, Ch. 2 


Governor and Depart- 
ment of Finance 


Iowa .... 


Acts and Joint Resolutions of 191 5, 
Ch.74 


Governor 


Kansas . . . 


Session Laws of 1917, Ch. 312 


Governor 


Louisiana . . 


Acts of 191 6, Act No. 140 


Board of State Affairs 


Maine ... 


Laws of 191 5, Ch. 299 


Governor and Council 


Maryland . . 


Constitution, Art. Ill, Sec. 52 


Governor 


Massachusetts. 


General Acts of 1918, Ch. 244 


Governor 


Minnesota , . 


Session Laws of 191 5, Ch. 356 


Governor 


Nebraska . . 


Laws of 191 5, Ch. 229 


Governor 


New Jersey. . 


Acts of 191 6, Ch. 15 


Governor 


New Mexico . 


Laws of 1917, Chs. 81, 114 


Governor 


New York . . 


Laws of 1916, Ch. 130 


Committees on Finance 
and Ways and Means 


North Carolina 


Public Laws of 1917, Ch. 180 


Legislative Reference Li- 
brarian 


North Dakota. 


Laws of 191 5, Ch. 61 


Budget Board 


Ohio .... 


Legislative Acts of 191 3, p. 658 


Governor 


Oregon . . . 


General Laws of 1913, Ch. 284 


Secretary of State 


South Dakota . 


Laws of 191 6-1 7, Ch. 354 ; 


Budget Board 


Tennessee . . 


Public Laws of 191 7, Ch. 139 


Budget Commission 


Utah .... 


Laws of 191 7, Ch. 15 


Governor 


Vermont . . . 


Acts and Resolves of 191 5, No. 26 


Budget Committee 


Washington . 


Session Laws of 191 5, Ch. 126 


State Board of Finance 


Wisconsin . . 


Session Laws of 191 1, Ch. 583; Laws 
of 1913, Ch. 728; Laws of 1915, 
Ch. 606 


Board of Public Affairs 



^ Taken from Report of Commission appointed to compile Infor77iation for the 
Constitutional Convention in Massachusetts. 



FINANCIAL LEGISLATION 915 

The impression gained from a cursory reading of the fore- 
going summary is that the present trend in the evolution of an 
American budget is in the direction of the "executive budget." 
In all of the states named, with the exception of the state of New 
York, the Governor or some officer or board attached to the 
executive, as distinct from the legislative department of the gov- 
ernment, is made responsible for original estimates. The method 
of making estimates, the classification of estimates, and the cen- 
tralization within the administration of authority over estimates, 
have greatly improved the situation as compared with the cus- 
tomary procedure prior to 1910; but it would be an error to 
assert, as many writers seem inclined to do, that the enactments 
referred to create executive budgets. In a few states only is 
there any provision that the classification of estimates furnished 
by the executive should give shape to the finance bills on which 
the Legislature is to vote. In a few states only has the Legis- 
lature consented to curtail the right of members to submit amend- 
ments to such bills while on their passage to enactment. Even in 
the case of Maryland, which confers on the Governor unusual 
powers in dealing with finance bills, the Legislature still has the 
right to authorize expenditures for purposes not included in the 
Governor's program, provided it has first disposed of the pro- 
posals submitted by the Governor and can raise the needed funds. 
The rejected New York constitution of 191 5 contained a similar 
provision. Some adjustment of this sort is doubtless necessary 
to provide against suspension of public business because of a 
deadlock between the Governor and the Legislature, but it has 
no place in a true executive budget. 

The most significant feature of the enactments cited in the 
foregoing summary is that which deals with executive procedure 
in the matter of estimates and, as such, marks an important step 
in the development of sound budgetary practice. Three tend- 
encies are disclosed by the rules laid down. 

First, these laws recognize that the authoritative estimates for 
future expenditures should be made by those who have charge 
of current expenditures and not by those who authorize services. 
The budget, in its initial stage, pertains to the executive. Nine 
of the twenty-five states that have enacted budgetary laws since 
1900 impose the duty of original estimates on the Governor. In 
Massachusetts, for example, the law makes provision for a 



9l6 SELECTED READINGS IN PUBLIC FINANCE 

"supervisor of administration," whose duty it is to "study 
and review all estimates" and to "prepare a budget for the 
Governor, setting forth such recommendations as the Governor 
shall determine upon." This makes the Governor responsible 
for the budget as submitted to the Legislature. 

Eight of the states listed in the summary make use of some 
board or commission for the initial preparation of the budget, 
but these boards are composed either exclusively of administra- 
tive officers or other members appointed by the Governor, or, in 
case members of the Legislature are on such boards, the deciding 
vote lies with the Governor. The organization of these boards is 
instructive. 

SUMMARY OF SPECIALLY ORGANIZED BODIES FOR DEALING 
WITH BUDGET SYSTEMS 





Name of State 


Name of Board or Other 
Organization 


Total 

No. of 
Members 


No. 
Ex Officio 
Members 

FROM THE 

Legisla- 
ture 


No. 
Ex Officio 
Members 
from the 
Adminis- 
tration 


No. OF 
Members 
appointed 

BY THE 

Governor 


Connecticut . 


State Board of Finance 


6 





3 


3 


Louisiana . . 


Board of State Affairs 


3 


— 




3 


North Dakota 


State Board of Finance 


7 


3 


4 




South Dakota 


Budget Board 


3 




3 


— 


Tennessee . . 


State Budget Commission 


5 


— 


5 


— • 


Vermont . . . 


State Budget Committee 


7 


3 


4 


— 


Washington . 


State Board of Finance 


3 




3 


— 


Wisconsin . . 


Board of Public Affairs 


9 


4 


2 


3 



From the foregoing statement it appears that three states only 
provide for legislative representation on the body imposed with 
the duty of primary estimates, and that even in these cases the 
Governor holds the balance of influence. In the opinion of the 
writer, these three states, North Dakota, Vermont, and Wiscon- 
sin, are the only states that have taken the proper stand from 
which to develop sound budgetary procedure for governments of 
the American constitutional type. What they have done is con- 
sistent with the idea of a joint budget. They have at least started 
in the right direction. 

Slightly different adjustments are made by the laws of other 



FINANCIAL LEGISLATION 917 

states. In 1913 the general assembly of Illinois created a legis- 
lative reference bureau and assigned to that bureau the duty of 
preparing a detailed budget for the use of the Legislature. But 
in 1917 this adjustment gave place to greater centralization of: 
authority. The administrative code of that date created a De- 
partment of Finance under the supervision of a director ap- 
pointed by the Governor. According to this adjustment, the 
presumption is that the Governor controls the budget. Whether 
or not that presumption is tenable, experience alone can deter- 
mine. In Oregon the Secretary of State initiates the budget esti- 
mates, while in North Carolina this duty is performed by the 
legislative reference librarian. Almost any kind of results can 
emerge from such arrangements. New York, alone of all the 
states, has provided for initiative and control over estimates by 
a committee of the Legislature. 

Second, a second trend toward sound budgetary practice is 
found in those provisions of recent legislation which aim to keep 
the budget as a bill in harmony with the budget as an estimate. 
In Vermont, for example, the law undertakes to curtail the prac- 
tice of direct and personal appeals to the Legislature. The gen- 
eral rule is that all claims against the state as well as all requests 
for appropriations by public officials of all classes will not be 
considered unless they have been filed with the secretary of the 
budgetary committee. In Maryland, not only may the Governor 
require itemized estimates from all departments and services and 
institute public hearings on all such estimates, but he may, at his 
discretion, revise these estimates, excepting only those that per- 
tain to the Legislature, the courts, and the public schools. Similar 
provisions may be found in the enactments of other states, even 
in those of the states which make no mention of administrative 
centralization in the making of estimates. 

The plain inference from recent enactments is that the Gover- 
nor has, by virtue of the responsibilities imposed upon him, full 
authority to control administrative officers in matters of estimates 
and requests for appropriations. In this regard the trend of 
current legislation may be fully approved. 

Third, a third significant feature suggested by a study of recent 
budgetary legislation pertains to the importance of a standard 
classification for estimates. In Massachusetts, for example, the 
Act of 1918 requires separate estimates and recommendations 



91 8 SELECTED READINGS IN PUBLIC FINANCE 

under four general heads with appropriate subheadings. In Ver- 
mont the budget committee secures estimates from departments 
and services on blanks prepared and furnished by the commit- 
tee, and the structure of such blanks is outlined in the law. For 
the most part, however, the budgetary enactments of the states 
are silent on this point, notwithstanding the fact that a proper 
classification of estimates is perhaps the most vital of the tech- 
nical requirements of sound budgetary practice. Without a 
standard classification that can be followed from year to year no 
fruitful comparisons of the cost of government can be made. 
Only on the basis of a satisfactory classification of estimates 
would it be possible for the Legislature to accept budget estimates 
as the bases of appropriation bills. So important is this point 
that it should be made the subject of a special study. 

Conclusions respecting American Budgetary Reform 

Most of the underlying principles of sound budgetary pro- 
cedure have been disclosed by the foregoing discussion. The 
difficulty lies in the application of these principles and in the 
formulation of definite rules for the control of financial practice. 
On one point there should be no difference of opinion. The 
type of budget adapted to the political organization of the Am- 
erican people is that of the joint legislative and executive budget. 
A budget of the German type is not wanted; a budget of the 
English type, even if it were wanted, could not be introduced ; a 
budget of the congressional type, or of the type recently adopted 
by the state of New York, rests on a vicious political principle. 
As long as the Legislature seeks to control original estimates sub- 
mitted by the administration, it is futile to look for efficiency and 
economy in government affairs. The constitutional situation in 
this country demands formal, conscious, direct, and continuous 
co-operation between those departments of government clothed 
with legislative and administrative authority. In order to realize 
sound financial practice, governments of the American type must 
work out reform along the lines of a joint budget. 

This conclusion, simple in itself, means quite a number of 
things. 

On its administrative side, it means the formulation within the 
executive department of specialized rules for making estimates 



FINANCIAL LEGISLATION 919 

and an organization of executive departments and services of 
such a sort that the estimates submitted shall stand for a con- 
sistent political program. Those provisions in the recent enact- 
ments of certain of the states which impose on the Governor the 
task of framing the budget, and of framing it in such a way that 
it may be followed in the writing of finance bills, are defensible. 
Indeed, they are essential for the realization of the end sought. 
The federal situation is not quite so hopeful. The only con- 
gressional enactment which requires a consideration of estimates 
by the chief executive before their submission to Congress is 
found in the Law of March 4, 1909, which recites, in effect, that 
if estimated expenditures are in excess of estimated revenues, it 
becomes the duty of the President to advise Congress how, in his 
judgment, the balance should be restored. That is to say, when 
the treasury is empty. Congress wants the President to propose a 
plan of economies, but when the treasury is full. Congress wants 
no advice from the President. As long as this situation maintains, 
it is idle to expect reform in federal budgetary procedure. 

On its political side, the establishment of a satisfactory budget 
involves the refusal of the Legislature as a voting body to as- 
sume responsibility for the details of finance bills. In no other 
way can the Legislature exercise efficiently its constitutional 
control over public policies. The man who guides the business 
policies of a business organization is not the man who concerns 
himself primarily with details. On the contrary, the strong man 
of a corporation is he who insists that those whose task it is to 
concern themselves with details should perform that task in a 
proper manner. This generalization is equally true for political 
bodies. It is not too much to say that the weak spot in the Amer- 
ican organization for popular government is the diffusion of legis- 
lative energy, and nowhere does this appear more clearly than 
in connection with financial legislation. The finance committees 
do a vast amount of unnecessary work. They undertake original 
investigations to secure results which are, or should be, the by- 
product of an efficient administration, and which should be made 
available for a study by the Legislature of the broad interests in- 
volved in the voting of specific appropriations. Legislators in 
this country will increase their substantial influence by aban- 
doning some of their cherished prerogatives. 

On its technical side, budgetary reform in the United States 



920 SELECTED READINGS IN PUBLIC FINANCE 

means a scientific classification of public services. This is no 
slight task. The classification required is one that will serve as 
the framework of a book of estimates, which, in turn, may be used 
as the basis of finance bills that carry legislative appropriations. 
The problem thus introduced is too exacting for cursory com- 
ment. It involves a detailed analysis of governmental functions 
and an exhaustive study of balance in appropriations. It calls 
for the same kind of expert treatment as is required for the 
formulation of a system of accounting records for a complex 
business enterprise. 

The chief obstacle to satisfactory budgetary reform in the 
United States is not found in any of the technical requirements 
to which reference has been made. It lies rather in the miscon- 
ception on the part of legislators as to the character of the in- 
fluence they should exert in a popular representative government. 
Legislative bodies must be willing to surrender, or at least to 
curtail in a marked degree, the right of individual initiative and 
amendment so far as appropriation bills are concerned, and this 
they will do when they come to understand that their jealous 
retention of control over matters which are administrative in 
character weakens their influence as that department of govern- 
ment intrusted with the control of public policies. 



